Released: December 2016

This guidance was developed in collaboration with Not-for-profit Law at Justice Connect.

Reserves play an important role in the financial stability and long-term sustainability of a charity. Managing reserves is an important aspect of the overall financial management of a charity – a crucial element of good charity governance.

In line with good governance and proper risk management, a charity’s responsible persons should consider an appropriate level of reserves for its circumstances, as well as a strategy for building or spending its reserves in a way that is consistent with its purpose.

The purpose of this factsheet is to provide general guidance on reserves for charities: what reserves are, why they might be needed, and how charities can determine an appropriate level of reserves. This factsheet is not relevant for grant-making charitable trusts and foundations that manage a corpus.

Throughout this factsheet we use the term ‘reserves’ broadly to refer to charity funds which, in a technical accounting sense, would commonly be called ‘operating reserves’. Unless specified otherwise, the use of ‘reserves’ in this factsheet should be read as meaning ‘operating reserves'.

Our use of the term ‘reserves' in this factsheet does not include 'restricted reserves' (funds set aside as reserves for a particular purpose and not available for discretionary use) or 'revaluation assets reserves' (such as gains or losses on revaluation of unsold fixed assets for the charity's own use).

What reserves are and where they come from

Reserves are unrestricted funds that are available to a charity to spend at its discretion.

They are funds that a charity sets aside to cover unexpected or sudden costs – often referred to as a ‘rainy day’ fund or financial ‘cushion’. In some cases, a charity may receive a special grant or donation specifically for the purpose of creating or supplementing reserves, but typically reserves are accumulated by a charity over time. Reserves are identified as a separate line item in a charity’s financial statements.

When considering charity reserves, it is important to remember that a charity can make a profit. In fact, charities should aim to do so – especially if they are low on reserves. Any profit a charity makes must be put towards pursuing the charity’s purpose, which may include contributing to the charity’s reserves (to an appropriate level). Such contributions help to ensure the financial stability of the charity.

Generally, the following are not considered to be part of a charity’s reserves, although they are relevant to understanding a charity’s overall financial position:

  • tangible assets (such as buildings, equipment and other items used in delivering services)
  • land
  • ‘restricted’ funds guaranteed or quarantined for a particular purpose (such as specified by a donor or by an appeal of the organisation).

As well as supporting a charity’s financial stability and sustainability, reserves can play an important part in a charity’s management of risk

Reserves help to maintain financial stability and allow a charity to meet its commitments, continue to undertake work and deliver services, even when unexpected events or costs arise. There are a range of situations in the life of a charity where reserves may be needed.

The responsible persons of a charity may decide to use reserves to fund improvements or new projects that will ultimately help its beneficiaries. For example:

  • investing in new programs or expansions (such as funding the opening of a new operating location)
  • piloting new programs or initiatives
  • improving infrastructure (such as upgrading IT systems or equipment), or
  • funding a major event (such as a significant fundraising appeal).

A charity may also need to draw on its reserves to respond to unexpected changes in its financial position. For example, it may need reserves to cover:

  • unexpected cuts to funding
  • significant unexpected costs (such as moving premises due to an unexpected termination of a lease)
  • unexpected staff costs (such as redundancies in the event that a major contract is lost)
  • unexpected expenditure (such as a program or project not accounted for in initial budget forecasts or an increase in the cost of goods)
  • unexpected events calling on the charity’s service (such as a natural disaster requiring extra services with little warning)
  • downturns in fundraising income, or
  • unexpected legal costs.

A healthy level of reserves is a sign of a well-governed and resilient charity. For this reason, maintaining reserves can help a charity:

  • attract funding where a level of reserves is required or considered favourable
  • provide assurance to lenders and members that it is financially stable, and
  • invoke public trust and confidence in its efficiency and capability.

Case Studies

Example 1 – A new funding landscape

A community health organisation that works with children with cerebral palsy will soon provide services under the National Disability Insurance Scheme (NDIS).

As a result of this transition to the NDIS, the charity anticipates that, in the short term, its income will decrease (as it will be competing with other NDIS providers) and its expenses will increase (as it will need to establish itself as a preferred treatment provider). The charity’s board is worried that it may be difficult for the charity to meet all of its operational expenses during this time.

The board decides to release 20 per cent of its reserves to ensure that it will be able to meet crucial expenses such as rent and staffing costs during the transitional period.

Example 2 – An unexpected funding cut

A charity learns that it has been unsuccessful in applying to have a grant renewed. This caught the charity’s committee off-guard because the funder has had a long relationship with the charity and previously indicated that its financial support would continue.

A number of staff positions and programs are reliant on this funding and the charity must work hard to attract funding from other sources. Without new sources of funding, the charity ‘s programs will need to be terminated and a number of positions will become redundant.

The charity has a healthy reserves balance and decides that it will use its reserves to cover its programs’ expenses and staff wages for 3 months. If no funding has come through after 3 months, the charity’s committee will make the decision to terminate its programs. There will still be sufficient reserves to pay any redundancy entitlements.

Example 3 – Attracting funding

A charity is applying for a major grant that will be paid in arrears. The grant is for the implementation of a new nation-wide program that will involve significant upfront costs (primarily extra staff wages and rent for new offices). The charity must show that it has sufficient reserves to meet these expenses and remain financially viable throughout the duration of the grant period, until it receives the grant funds.

There is no single level that will be considered appropriate for all charities. Naturally, all charities are different and their needs and financial positions are different.

Each charity will need to assess its own situation and decide on an appropriate level of reserves at a particular point in time, taking into account the various risks to its financial position.

On one hand, having no or little reserves may be detrimental to a charity. A low level of reserves may place a charity’s operations at risk if it is face with sudden unexpected costs. Also, having low levels of reserves may affect staff morale as there may be concerns that their continued employment or entitlements could be at risk if adverse events occur.

On the other hand, accumulating a high level of reserves without a clear explanation or justification may adversely affect the public’s perception of a charity. Unjustifiable stockpiling of reserves may also cause concern for the regulator that charitable assets are not being used for a charitable purpose. Charities should be focused on pursuing their purposes and using their funds to do so, rather than stockpiling reserves unnecessarily. Appropriate notes in a charity’s financial statements should provide justification for high levels of reserves.

Explaining reserves

A charity should clearly explain to the public, regulators and potential funders what it considers to be an appropriate level of reserves and why. This statement should be updated to reflect any changes in the charity’s reserves and its reserves policy

How should a charity determine an appropriate level of reserves?

To determine an appropriate level of reserves, it is important for the responsible persons of a charity to analyse the charity’s situation and determine the risks it faces. This should include all aspects of running the charity: its operations, governance, staffing, clients, funding landscape, liabilities and the external market.

There are a number of questions the responsible persons of a charity should ask (and answer) to help determine an appropriate level of reserves (although this will help shape a charity’s approach, this is not an exhaustive list):

  • What liabilities (current and future) does the charity have?
  • What staff entitlements (current and potential) exist?
  • What changes in the funding or political landscape may affect current and future income streams?
  • What external trends may affect the public’s willingness to give to the charity (both time and money)?
  • What external events may affect the charity’s service (such as natural disasters)?
  • What compliance issues (current or potential) need to be addressed?
  • Are there any potential legal claims that could be brought that will not be covered by insurance policies?
  • What upcoming repairs or upgrades are needed (such as property, equipment, IT systems, etc.)?

Having assessed the charity’s situation and risks, the responsible persons should begin to see a picture of an appropriate level of reserves for their charity.

What can reserves be used for?

A charity must spend its reserves in the same way that any of its funds are spent – in furtherance of its charitable purposes.

Other than that, there are no hard rules about what reserves can and can’t be used for. Exactly how reserves are used is ultimately a decision for a charity’s responsible persons and should be considered on a case-by-case basis.

A charity’s responsible persons may decide to maintain reserves for particular purposes they have in mind (such as for a project, a new paid position or anticipated significant costs), or to keep them as general reserves which cover unexpected costs and help ensure general financial stability and sustainability. Many charities divide their reserves into general ‘rainy day’ reserves and those earmarked for particular purposes or investments.

It is important to remember that bequests or donations that come with specific conditions should not be included in general reserves. To make it clear that such funds are restricted to a particular use, they should be presented as separate line items in a charity’s financial statements.

The responsible persons of a charity should develop and implement a policy that governs their charity’s use of reserves. A policy can provide guidance and rules for the responsible persons which ensure that the charity’s reserves are being used for their proper purposes.

A reserves policy

A charity’s policy for managing reserves should include:

  • why it is important for the charity to have reserves
  • an appropriate level of reserves for the charity (updated from time to time)
  • a clear explanation for how the charity determines its appropriate level of reserves (such as a formula, or a range of formulas)
  • a strategy for building an appropriate level of reserves
  • a process for reviewing the level of reserves
  • the authority within the charity for determining and using reserves
  • reporting and monitoring requirements
  • how reserves will be identified in accounts and budgets
  • criteria by which spending reserves is considered
  • a communication strategy for explaining the charity’s reserves to the public

If developing a policy from scratch, it may be useful for the responsible persons of the charity to look at the financial information available for similar organisations on the ACNC Charity Register.

Can a charity spend all of its reserves?

Yes, but a charity that spends all of its reserves will place itself at risk of being unable to continue its operations or pay its debts if something unexpected happens which affects the charity’s anticipated income. This places the charity at risk of becoming insolvent.


The board of a charity reviews its reserves and decides that it is unlikely to have to draw on them in the near future because the charity’s main funding streams are secure (for 3 years). The board decides to invest 65 per cent of the charity’s reserves in a low-risk term deposit and keep the remaining amount available for unexpected expenses. The board aims to grow its reserves through its investment strategy, and then, once the term deposit has matured, invest 35 per cent of those reserves into commissioning research.

Two months later, the charity receives a complaint about a potentially dangerous tree on its property. An arborist is consulted and she determines that the tree must be removed immediately. The general maintenance fund does not cover the cost, so the board uses the reserves that are available to draw on to pay for the removal of the tree.

In some circumstances, a charity may be seen as having too much money in reserve. Because a charity must be pursuing a charitable purpose, a charity that holds a large amount of money in reserve without a clear explanation and justification may draw attention from funders and regulators.

Where a charity’s responsible persons consider their charity’s level of reserves to be too large, they may need to spend some of it to bring it back to an appropriate level. They could do this through investing in new programs or by donating funds to other charities pursuing the same or similar purposes (a charity should get legal advice before giving funds to another organisation). It is important to remember that any spending of reserves, similar to uses of other charity funds, must be in furtherance of the charity’s charitable purpose.

A charity’s responsible persons are, collectively, responsible for ensuring that the charity maintains an appropriate level of reserves.

This is an important part of the governance of a charity – responsible persons must act in the best interests of the charity and provide oversight of financial and risk management.

Good governance of a charity also means complying with the law and legal duties of responsible persons. Under the ACNC’s Governance Standards, the duties of a charity’s responsible persons include acting with reasonable care and diligence, ensuring the financial affairs of the charity are managed responsibly, and not allowing the charity to operate while it is insolvent.

A charity is insolvent if it is unable to pay all its debts when they fall due. It must have access to enough cash (including deposits and loans) and expected future income to meet its current and expected future expenses.

The responsible persons of a charity should consider the role of reserves in ensuring their charity remains solvent and financially stable.

For more information about the financial management obligations of a charity’s responsible persons, see Managing charity money – a guide for board members managing finances and meeting ACNC duties (available at

For more information about good charity governance and the general obligations of a charity’s responsible persons, see Governance for good - the ACNC's guide for charity board members (available at