How Charities Work
Why a Charity Sitting on Money Is Not Necessarily Hoarding
Reserves attract criticism whenever they are visible and save organisations whenever they are needed. The judgement is about the policy, not the number.
The options around charity reserves are set out side by side below, with the conditions that genuinely favour one over the other.
The difference in one place
- Reserves cover redundancy, commitments and income failure.
- Trustees in many jurisdictions must explain their reserves target.
- Some visible balances are legally unavailable to spend.
What reserves are for
Free reserves are unrestricted funds not tied up in property or committed to specific spending, and they exist to absorb shocks. The obvious shock is income failing, whether a grant ends, a contract is lost, or a major donor stops giving without warning. The less obvious one is orderly closure, since an organisation ceasing operations still owes notice pay, redundancy and lease obligations.
Trustees who spend down to nothing and then discover they cannot meet those obligations have created a problem rather than avoided one. Reserves also fund the gap between committing to something and the money for it arriving, which is a routine occurrence.
Why the criticism happens
A visible balance looks like money withheld from beneficiaries, which is an intuitive reaction and occasionally a correct one. The intuition ignores that most charitable income is committed, restricted or uncertain, so a bank balance is not free money.
It also ignores that an organisation collapsing mid-programme causes more harm than one that maintained a buffer. Media coverage of charity reserves rarely distinguishes restricted from unrestricted funds, which makes the reported figures close to meaningless. The result is a genuine pressure on trustees to hold less than prudence would suggest.
What the policy should say
Most reporting frameworks require trustees to state a reserves policy, explain the target range and say where they currently sit. A good policy justifies the target by reference to specific risks rather than to a generic number of months.
It should also say what trustees will do if reserves fall below or rise above the range, which is where most policies go vague. An organisation holding far more than its stated target without explanation has either stopped updating the policy or is not following it. Reading the policy takes two minutes and is a better guide to financial management than any ratio.
What looks like reserves and is not
Restricted funds appear on the balance sheet and cannot be spent on anything other than their stated purpose. Endowment funds may be permanently capital-locked, so only the investment income is available and the principal never is. Property is an asset and not a resource, since selling the building an organisation operates from is not a funding strategy.
In the annual accounts, designated funds are unrestricted money earmarked by trustees, which is genuinely available but has an intended use.
Adding these together and reporting the total as a charity sitting on money is the standard error in reserves criticism.
Too few reserves
Organisations running with almost no buffer make short-term decisions, including accepting unsuitable contracts to cover a cashflow gap. They also lose staff, because job security is part of pay and people leave organisations that cannot guarantee three months ahead. The absence of reserves is one of the strongest predictors of small charity failure, and failure destroys accumulated capability entirely.
Rebuilding a closed service is far more expensive than sustaining one, though that cost never appears in anybody's accounts. Underfunded reserves are therefore a more common problem in the sector than excessive ones, despite the direction of public criticism.
Organisations need what they say they need, which is often unglamorous and often money.
What a donor should conclude
A charity with a clear policy, a stated target and a position near it is demonstrating competent financial governance. One with large unrestricted reserves and no explanation is worth asking about, and a good organisation will answer directly. Unrestricted giving is what allows reserves to be built at all, so donors concerned about resilience should give unrestricted money.
Judging an organisation on a single balance figure without reading the fund note produces confident and wrong conclusions. The question to ask is not how much they hold but whether they can explain why.
Side by side
| Consideration | What it means in practice |
|---|---|
| What reserves are for | Reserves cover redundancy, commitments and income failure. |
| Why the criticism happens | Trustees in many jurisdictions must explain their reserves target. |
| What the policy should say | Some visible balances are legally unavailable to spend. |
The takeaway
Judge the reserves policy, not the balance, and remember that most of what you can see is spoken for.
Passed on beats recycled, and both beat replaced.
Questions readers ask
Should I avoid giving to a charity with large reserves?
Not automatically, since much of what looks like reserves is restricted or committed. Read the reserves policy and the fund note before drawing a conclusion from the headline figure.
How many months of reserves is normal?
It varies widely with how predictable the income is and what commitments exist. What matters is that trustees have set a target for stated reasons and are near it.
Also by Dhruv Namdeo
- Charity Mergers Happen Less Often Than They Probably ShouldHow Charities Work
- What Non-Profit Does and Does Not MeanHow Charities Work
- Impact Reporting: Outputs, Outcomes and the Gap Between ThemHow Charities Work
- The Founder Problem: When a Project Cannot Outlive Its StarterCommunity Projects
