Reserves are the most misunderstood figure in charity accounts. Donors often read any reserve as hoarding, while trustees have a legal duty to make the charity resilient. Both positions can be right, and the accounts show which applies.
What reserves actually are
Reserves are the free funds a charity could spend if its income stopped tomorrow. The technical definition excludes several things:
- Restricted funds — money given for a specified purpose, which cannot lawfully be spent on anything else.
- Endowment — capital that must be retained, where often only the investment income can be spent.
- Funds tied up in fixed assets — a hospice cannot pay salaries with its building.
What remains is usually described as free reserves, and it is what “months of reserves” refers to: free reserves divided by monthly operating costs.
How many months is healthy
There is no statutory minimum. The Charity Commission’s position is that every charity should set, publish and justify its own reserves policy. In practice:
- Under 3 months — fragile. One late grant or lost contract can force redundancies or closure.
- 3 to 24 months — the range most UK charities target, and where the Clarity Score awards full marks, tapering on both sides rather than applying a hard cutoff.
- Over 24 months — may be entirely justified, but should be explained. Without explanation it suggests donations are accumulating rather than being deployed.
Different models justify different levels. A charity delivering a government contract with predictable income can safely hold less than one relying on unpredictable public donations. A charity with long-term care commitments to identifiable people needs more, because it cannot simply stop.
Why very low reserves are a real risk
Charities with negligible reserves are the ones that fail suddenly. When they do, the loss is not only organisational: services stop, staff lose jobs, and the people relying on them are left without notice. A charity that has run at under a month of cover for years is telling you something about its financial management, even if every individual year looked survivable.
Low reserves also constrain good decisions. A charity that cannot absorb a bad month cannot invest in fundraising, hire ahead of growth, or turn down unsuitable funding.
Why very high reserves need explaining
The opposite pattern deserves scrutiny too. If a charity holds five years of running costs, has no stated plan for the money, and continues to fundraise urgently, the honest question is what the funds are for. Sometimes the answer is excellent — a capital project, an endowment protecting future services, or a deliberate buffer after a near-miss. Sometimes there is no answer, which is itself the finding.
Look for the reserves policy in the trustees’ annual report. Good ones state a target range, explain the reasoning, and say what the trustees will do if reserves fall outside it.
How to check reserves yourself
- Download the latest accounts from the charity’s register entry.
- In the trustees’ annual report, find the reserves policy and the target level.
- In the balance sheet, find total funds split into unrestricted, restricted and endowment.
- Divide free reserves by monthly expenditure to get months of cover.
- Compare the result to the charity’s own stated policy — the gap matters more than the absolute number.
Every rated profile on CharityCompare shows reserves in months alongside five years of income and expenditure, so you can see the trend without opening a PDF. To see how a charity’s resilience compares with peers on the same cause, use the comparison tool.
For the wider context of how reserves sit alongside cause spend and fundraising costs, read how to read charity accounts and how much of my donation reaches the cause.