 board how much they should hold in reserve and the conversation usually drifts toward a number: three months, six months, a year. It rarely starts with the harder question of what the money is actually for. That gap between having a figure and understanding its purpose is where many charities run into trouble.

 strategy, explains, reserves ultimately exist to give organisations financial resilience. "We expect charities to live off nothing but deliver phenomenal things," he notes, and without adequate funds set aside, that expectation becomes unsustainable.

Why Reserves Exist Beyond a Rainy-Day Fund

Reserves serve three distinct functions, according to Mesquita: managing immediate cash flow, funding planned expenditure such as an IT project or new fundraising resource, and covering genuine emergencies. The last of these has an obvious recent example. When the government raised employer national insurance contributions, many organisations faced costs they had not budgeted for 

. Charities warned the change would add roughly £1.4 billion a year to sector-wide payroll costs, hitting those employing significant numbers of staff hardest 

National Insurance: Charity Sector (Lords debate)

Preparing for 2025 budgetary constraints

's own guidance backs this framing: there is no single level or range of reserves that suits every charity, and any target should reflect the organisation's particular circumstances 

. That principle sounds obvious, yet it is routinely ignored in favour of round-number rules of thumb.

Charity reserves: building resilience (CC19)

Free Reserves: The Money With No Strings Attached

 are the simplest category to understand and, according to Mesquita, effectively enable a charity to spend money on anything that delivers its purpose, whether that is core costs or direct support for beneficiaries. There are no restrictions attached. As the saying inside the sector goes, the money is genuinely free.

This is the category most reserves policies are really describing when they quote a target figure. It excludes money tied up in fixed assets or committed to a specific purpose, leaving only what a charity could realistically draw on at short notice.

Restricted Funds and the Donor's Instructions

 work differently. A donor gives money for a defined purpose, perhaps to fund a specific piece of medical research or a cohort of PhD students, and that money must be spent accordingly. Mesquita is direct about the constraint: a trustee cannot decide it would be nicer to spend it elsewhere. Any change requires going back to the original donor to agree an alteration.

This distinction matters because restricted funds sitting on a charity's balance sheet can create a misleading impression of financial strength. A large restricted fund does nothing to help with unplanned redundancy costs or a sudden drop in unrestricted income.

Designated Funds and the Discipline of Ring-Fencing

 sit in a middle position. They are, in substance, still free reserves, but trustees or the finance team have chosen to ring-fence a portion for a particular purpose, building maintenance or a future IT project, for example. The advantage over restricted funds is flexibility: because the designation is a trustee decision rather than a donor condition, it can be changed if circumstances shift.

That flexibility is precisely why designated funds require discipline. Ring-fencing money without a clear rationale, or leaving old designations unreviewed for years, can quietly distort what a board believes it has available.

Permanent and Expendable Endowments: Balancing Today and Tomorrow

Endowments introduce a longer time horizon. With an 

 but leaves it to trustees' discretion whether to spend the income, the capital, or both, and over what period. Some charities decide to spend down a multi-million-pound endowment over a decade; others hold it indefinitely.

 is stricter and more commonly found in older, pre-war charities. "You can't spend the capital, you can only spend the income," Mesquita says plainly. This is the only category of charity money that forces trustees to balance today's beneficiaries against future ones directly, since spending too freely from income now can erode what is available for those who come later. A total return approach can soften that rigidity in some circumstances, though the detail goes beyond what most boards need day to day.

Historically, charities defaulted to round figures: three, six, nine or twelve months of running costs. Mesquita argues this is too blunt. "The best thing to do is to have a range you want as the minimum and the maximum within an organisation," he says. The more useful starting point is a charity's actual liabilities, staff costs, existing contracts and other commitments, from which a realistic minimum and maximum can be built.

Two examples illustrate why one figure cannot work across the sector. A grant-making charity funded almost entirely by investment income can operate comfortably with around six months of running costs in reserve, since its giving is entirely at its own discretion. A medical research charity dependent on fundraising faces far less predictable income and therefore needs a deeper buffer to absorb unexpected shortfalls.

Charity Commission research from the early 2000s found over £5 billion held in reserves by charities that had no reserves policy at all, a reminder that the absence of a stated rationale is itself a governance gap 

. Mesquita's broader point is that strong reserves, properly explained, should be read as a sign of resilience rather than as money sitting idle. A funder wants the organisations it supports to still exist in five years, and financial strength is part of what makes that possible.

Charity reserves (RS3)

When Trustees Get the Fundraising Conversation Wrong

The most common mistake, in Mesquita's experience, is setting an unrealistic target: a figure with no genuine prospect of being reached, or one with no clear methodology behind it. The fix is the same range-based approach already outlined, tied to actual liabilities rather than sector convention.

A related pattern is fundraising teams pushing back on reserves, arguing that a healthy balance makes donors reluctant to give. Mesquita's advice to trustees is to turn the question around: ask the fundraising department what level of reserves it believes is appropriate. "I suspect the situation actually isn't the level of reserves," he says. "It's the way you go about explaining why you have the reserves and justifying them for the organisation." Investment strategy has a role here too: reserves earmarked for genuinely long-term purposes can be invested for growth rather than left static, provided the charity's investment policy and 

Charity: Building financial resilience

Reserves policy is often treated as an accounting exercise, a number to be justified once a year in the trustees' annual report. Mesquita's account suggests the opposite: it is closer to a governance judgement, revisited whenever the charity's income, liabilities or strategic plans shift, and built on a clear-eyed view of what each category of fund can and cannot do.

Reserves exist for three practical reasons:

 cash flow, planned expenditure and emergencies, not simply as a buffer for the sake of it, as Charles Mesquita of Quilter Cheviot explains.

Free reserves, restricted funds and designated funds are not interchangeable:

 each carries different rules on who can spend the money and for what purpose.

Permanent and expendable endowments force a different kind of decision:

 trustees must balance today's beneficiaries against future ones, not just manage a cash buffer.

A single reserves figure is rarely the right approach:

 a realistic minimum-to-maximum range, built from actual liabilities, tends to serve charities better.

Pressure to cut reserves for fundraising reasons should be challenged:

 the issue is usually how reserves are explained, not the amount held.

How Much Should a Charity Actually Hold in Reserves?

Charles joined Quilter Cheviot in 2017 with responsibility for developing the firm’s specialist charity capability. He is inquisitive by nature, happy to share my knowledge and passionate about doing right by our clients.

Charles has 30 years’ investment experience working for leading financial institutions including Newton, Rensburg Sheppards (now Investec Wealth & Investment) and latterly, Stanhope Consulting. Charles founded The Charities Property Fund, the first Common Investment Fund investing in UK commercial property and also established the first program focused on on-going education for charity trustees.

Charities Director

Charles Mesquita

As a wealth manager, Quilter Cheviot utilises its expertise in both Investment Management and Financial Planning to deliver a comprehensive and holistic service. This allows them to create bespoke financial plans and investment portfolios specifically designed to meet clients’ individual needs.

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Each client is assigned an experienced, dedicated Investment Manager who will create and manage their investment portfolio to help them achieve their own specific goals at every life stage. Their investment Managers have an average of over 16 years’ industry experience, with over 10 years at Quilter Cheviot.

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Poppy joined Quilter Cheviot in 2020 having spent over 13 years at Brooks Macdonald. Poppy joined Brooks Macdonald in 2006 where she had various roles, latterly as an Investment Director.

Investment director

As a discretionary investment manager, Andrew helps clients on their journey towards achieving their financial goals. He works closely with individuals, families, business owners, trustees, intermediaries, and pension schemes. Andrew enjoys finding out what is important to them and helping them understand, often complex, investment matters in a clear and simple way.

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Investment Manager

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Having commenced his investment management career with Adams & Remers solicitors in Sussex, he gained significant experience at Berry Asset Management (latterly Bordier & Cie) before helping to set-up Quartet Capital Partners in 2010, where he was Partner. Nigel joined Quilter Cheviot in early 2013.

He's proud to have made the PAM top 40 under 40 list two years in a row. This programme is established as a guide to rising stars in the private banking and private asset management sectors.

Charles Mesquita

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Charles Mesquita

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Articles from author

How Much Should a Charity Actually Hold in Reserves?

Start your journey to your Financial well-being

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Financial well-being