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 (Uncommitted) Reserves
Financial safety net for unexpected challenges
Provides flexibility during funding cuts or financial crises
Enables organizations 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 organization 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
Assess current financial position
Determine target reserve level
Create a strategic plan and budget to build reserves
Assess reserves position quarterly
Discuss and vote on reserve policy annually
Budgeting and reserves
Strategic approach
Use annual budgets to gradually build reserves
Example: A new organization 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.
Further support
If you need any help with our resources, feel free to contact us. We are happy to explain them and offer training. We can even redesign the tools a bit, perhaps expand them or develop new features, because these resources are fairly basic tools and they're not designed for everyone.
You may need to amend the tools yourself a little bit to suit your individual needs as an organisation, and we would encourage you to adapt them and make the resources work for you.
We hope you enjoy them and find them useful. Providing free advice and resources helps us achieve our own charitable goal, which is to help organisations run themselves more efficiently and effectively.
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