Charity reserves: Can they be too high, and does that matter?

Sounds like a pipedream, right?

You may not expect this to be an issue that many trustees have to worry about, especially with rising costs and it being increasingly difficult to raise funds. However, some charities have accumulated higher levels of funds, and this can bring new challenges.

Reserves aren’t bad. Building reserves is a necessary, prudent step, ensuring stability, resilience, the ability to respond to unforeseen challenges, and to plan strategically. It addresses a core responsibility of trustees. But whilst reserves are essential, over-accumulating them can hinder a charity.

Here are some key issues for trustees to be aware of:

Damaging donor confidence

Donors give to see change. If your charity is sitting on significant reserves, without a clear explanation, it may raise concerns about whether their contributions are truly needed, or being used wisely.

A transparent reserves policy maintains trust and demonstrates accountability. It may be that reserves aren’t excessive because of the risks the charity faces, or its plans for the future. In which case, it’s important to communicate this in your reserves policy. It may also be sensible to establish designated funds to provide a visual presentation of why funds are held. This is often more accessible to the readers of your accounts than a lot of words.

Regulatory scrutiny

The Charity Commission expects trustees to justify their reserves levels. Failure to do so can lead to uncomfortable questions. This actually happens. It’s not just a theoretical risk. A well-documented reserves policy, linked to risk and strategic planning, is both useful and a regulatory expectation.

Reducing your impact and missing opportunities

Charities exist to achieve their charitable purpose and to deliver public benefit, not to accumulate funds. Reserves should empower a charity, not inhibit it. Excessive caution can also lead to missed opportunities – whether that’s expanding services, investing in innovation, or responding to need.

Trustees must ask: Are we holding back resources that could be used to make a greater impact now?

What trustees can do

Trustees should:

• Develop and regularly review a reserves policy that clearly explains the rationale, target levels, and intended use of reserves. This should be driven by the strategic aims of the charity and the risks it faces. Done well, it will help identify whether there are ‘spare’ resources that can be used strategically.
• Communicate openly with stakeholders about why reserves are held and how they support the charity’s long-term sustainability and impact.

Final thought

It’s all about your reserves policy.

Forming a reserves policy isn’t easy – there are always many unknowns. The challenge is to strike the right balance between saving and spending, ensuring your charity remains both resilient and responsive, and ultimately doing what it was set up for, the best it can.

Need help?

If you're unsure whether your charity's reserves position is appropriate, or if your policy needs a refresh, we can help.

Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk.

Chris Yeates