Reserves basics

A practical guide to creating a business plan

Reserves are a critical financial tool for non-profit organisations, balancing the need for financial stability with the mission of spending funds effectively. This guide explores the nuances of reserve management, helping organisations strike the right balance between prudence and purpose.

Types of reserves

1. General (Unrestricted) Reserves

• Financial safety net for unexpected challenges

• Provides flexibility during funding cuts or financial crises

• Enables organisations to meet ongoing commitments

• Typically recommended at 25% of annual expenditure

2. Restricted Reserves

• Funds designated for specific purposes by donors

• Must be used exactly as intended

• Clearly documented in financial accounts

• Example: Funds earmarked for a specific project or equipment purchase

3. Designated Reserves

• Funds set aside by the organisation for specific future needs

• Examples include:

  • Building maintenance funds

  • Equipment replacement reserves

  • Future project funding

• Must be generated from own income, not restricted funds

• Decisions should be formally documented in committee minutes

Developing a reserves policy

Key considerations

There is no universal standard for reserve levels, each organisation must assess its own unique circumstances.

Consider factors like:

• Income security

• Contractual obligations

• Potential closure costs

• Future financial risks

• Balance immediate needs with long-term financial stability

Policy development steps

1. Assess current financial position

2. Determine target reserve level

3. Create a strategic plan and budget to build reserves

4. Assess reserves position quarterly

5. Discuss and vote on reserve policy annually

Budgeting and reserves

Strategic approach

Use annual budgets to gradually build reserves

• Example: A new organisation might aim to accumulate £10,000 over five years

  • Plan for annual surpluses

  • Gradually increase reserve levels

• Be prepared to explain reserve strategy to funders

Flexibility in financial planning

• Occasional deficit budgets may be acceptable

• Reserves can temporarily cover short-term financial gaps

• Regularly monitor and adjust financial strategy

Potential challenges

Funders may criticise you for holding “too many” reserves, and it can be difficult to convince funders of a reserve necessity but it is important to balance your current needs with future financial security.

Conclusion

Effective reserves management is about finding the right balance. It requires careful planning, transparent communication, flexible strategic thinking, an a commitment to financial sustainability. It is a good idea to develop a clear reserves policy and to regularly review your financial position.