How to Set a Reserves Policy for Your Australian Charity (with Template)

Ask ten board members what "reserves" means, and you'll get ten different answers. Some think it's a rainy-day fund. Others believe it's money you can't touch. A few think it's a sign of financial weakness—that you should spend every dollar on your mission.

The truth is simpler: reserves are the financial buffer that keeps your charity running when income dips. Without a clear reserves policy, your board is flying blind. You don't know how much cash you should hold, when you can spend it, or how to explain it to donors and regulators.

This guide walks you through setting a reserves policy that works for your charity—and includes a template you can adapt.

Quick Summary

• **Reserves policy** defines how much cash your charity should hold and why
• **Typical target**: 3–6 months of operating expenses (varies by sector and income stability)
• **Board approval required**: Your policy must be formally endorsed and reviewed annually
• **ACNC compliance**: Charities with strong reserves policies demonstrate better governance
• **Donor confidence**: A clear policy shows you're managing money responsibly, not hoarding it

Why Your Charity Needs a Reserves Policy

Imagine this scenario: Your charity's major government grant is delayed by three months. Your staff payroll is due next week. You have no reserves. You can't pay your team. Your services stop. Your community is let down.

This happens to charities every year. A reserves policy prevents it.

A reserves policy serves three purposes:

1. Financial stability: It ensures you have cash to cover unexpected income gaps or urgent expenses 2. Governance credibility: It shows your board is thinking strategically about financial risk 3. Donor and regulator confidence: It demonstrates you're managing money responsibly, not spending recklessly or hoarding unnecessarily

The ACNC recognises reserves policies as a sign of good governance. Charities with documented policies are less likely to face regulatory scrutiny.

How Much Should You Hold in Reserves?

There's no one-size-fits-all answer. Your reserves target depends on:

• **Income stability**: If your income is predictable (e.g., government contracts), you can hold lower reserves. If it's volatile (e.g., donations, grants), you need higher reserves.
• **Expense volatility**: If your costs are fixed and predictable, lower reserves suffice. If costs are variable or unpredictable, hold more.
• **Sector**: Schools and aged care facilities typically hold 3–4 months. Charities dependent on fundraising hold 6–12 months.
• **Strategic priorities**: If you're planning a capital project or expansion, you might hold higher reserves temporarily.

Common Benchmarks

| Sector | Typical Reserves Target | Rationale | |--------|------------------------|-----------| | Government-funded services | 2–3 months | Stable, predictable income | | Independent schools | 3–4 months | Tuition income is relatively stable; staff costs are fixed | | Aged care | 3–4 months | Resident fees are predictable; staffing is stable | | Charities dependent on grants | 4–6 months | Grant income is less predictable; need buffer for gaps | | Charities dependent on donations | 6–12 months | Donation income is highly volatile; need substantial buffer |

Calculating your target: Multiply your average monthly operating expenses by your target number of months. For example, if your monthly expenses are $50,000 and your target is 4 months, your reserves target is $200,000.

What Counts as Reserves?

Not all cash is "reserves." Reserves are unrestricted funds—money your board can decide to spend on any part of your mission.

What counts as reserves:

• Unrestricted cash in your bank account
• Unrestricted investments (shares, bonds, term deposits)
• Unrestricted funds held in a designated reserves account

What doesn't count:

• Restricted funds (grants or donations given for a specific purpose)
• Funds committed to capital projects or strategic initiatives
• Funds held for specific liabilities (e.g., employee entitlements, lease obligations)

Many charities make the mistake of counting restricted funds as reserves. This inflates your reserves position and misleads your board about actual financial flexibility.

Setting Your Reserves Policy: Step-by-Step

Step 1: Calculate Your Current Reserves

Add up all your unrestricted cash and investments. Divide by your average monthly operating expenses. This gives you your current "months of reserves."

Example: Your charity has $180,000 in unrestricted cash. Your average monthly expenses are $50,000. You currently hold 3.6 months of reserves.

Step 2: Determine Your Target Range

Based on your sector, income stability, and strategic priorities, set a target range. For example: "Our target is to hold 4–6 months of operating expenses in reserves."

A range (rather than a fixed number) gives you flexibility. If reserves dip below 4 months, you have a trigger to reduce spending or increase fundraising. If they exceed 6 months, you have a trigger to invest in strategic initiatives.

Step 3: Document Your Policy

Write a one-page policy that explains:

• Your reserves target (in months of expenses)
• Why you've chosen this target
• What counts as reserves (unrestricted funds only)
• How you'll use reserves (only in emergencies or for strategic initiatives approved by the board)
• How often you'll review the policy (annually)
• How you'll communicate the policy to stakeholders (annual report, website, donor conversations)

Step 4: Get Board Approval

Present your policy to the board for formal approval. Document the approval in your board minutes. This creates a governance trail and shows the ACNC that reserves management is intentional.

Step 5: Monitor and Review

Review your reserves position quarterly. Track whether you're moving towards your target. If you're significantly above or below, discuss the reasons and any actions needed.

Reserves Policy Template

Here's a template you can adapt for your charity:

RESERVES POLICY

Approved by Board: [Date] Next Review Date: [Date + 12 months]

1. Purpose

This policy sets out [Charity Name]'s approach to building and maintaining financial reserves. Reserves provide a buffer against income volatility and unexpected expenses, ensuring we can continue delivering our mission during challenging periods.

2. Reserves Target

We aim to maintain unrestricted reserves equal to [X] months of average operating expenses. Our current target is $[Amount], representing approximately [X] months of expenses.

3. Rationale

We have chosen this target because:

• Our income is [stable/volatile] (explain why)
• Our expenses are [predictable/variable] (explain why)
• Our sector benchmark is [X] months (cite source)
• Our strategic priorities require [additional context]

4. Definition of Reserves

Reserves comprise unrestricted cash and investments held in [specify accounts]. Reserves exclude:

• Restricted funds (grants or donations for specific purposes)
• Funds committed to capital projects
• Funds held for specific liabilities

5. Use of Reserves

Reserves may be used only for:

• Covering unexpected income shortfalls (e.g., delayed grants, lower donations)
• Funding emergency expenses (e.g., urgent repairs, staff redundancies)
• Strategic initiatives approved by the board (e.g., expansion, capital projects)

Reserves may not be used for:

• Routine operating expenses (unless income is genuinely unavailable)
• Discretionary spending not aligned with our mission

6. Building Reserves

If reserves fall below [X] months, the board will:

• Review the reasons for the shortfall
• Develop an action plan to rebuild reserves (e.g., increased fundraising, expense reduction)
• Report progress to the board quarterly

7. Using Excess Reserves

If reserves exceed [X] months for two consecutive quarters, the board will consider:

• Investing in strategic initiatives aligned with our mission
• Increasing program spending
• Increasing staff benefits or training
• Building a capital project fund

8. Monitoring and Reporting

We will:

• Report reserves position to the board quarterly
• Include reserves analysis in our annual financial statements
• Disclose our reserves policy in our annual report
• Review this policy annually and update as needed

9. Communication

We will communicate our reserves policy to:

• Board members (annually)
• Donors and funders (in grant applications and annual reports)
• Staff (in budget communications)
• Community (on our website and in annual reports)

Frequently Asked Questions

Q: Is it wrong to have high reserves? A: No, but you should be able to explain why. If your reserves exceed your target for an extended period, donors may question whether you're spending enough on your mission. Document your reasons (e.g., building towards a capital project) and communicate them.

Q: Can we use reserves for staff bonuses or pay rises? A: This depends on your policy. Some charities allow it (as a strategic use of reserves). Others don't (reserving funds for emergencies only). Be clear in your policy and consistent in how you apply it.

Q: What if our income is so unpredictable we need 12 months of reserves? A: That's legitimate. Charities dependent on fundraising or grants often need higher reserves. Document your reasoning and monitor whether you can reduce the target as your income becomes more stable.

Q: Should we invest our reserves? A: Yes, if appropriate. If your reserves will sit in a bank account for years, consider low-risk investments (term deposits, bonds, diversified funds). This generates returns and helps your reserves grow. Consult your accountant or financial adviser.

Q: How do we explain reserves to donors? A: Clearly and honestly. Say something like: "We maintain [X] months of reserves to ensure we can continue our mission during income gaps. This is prudent financial management, not hoarding. We spend [X]% of our income on programs and [X]% on administration."

The Bottom Line

A reserves policy isn't just good governance—it's essential risk management. It tells your board how much cash you need, why you need it, and what you'll do if you have too much or too little.

Set your policy, get board approval, monitor it quarterly, and communicate it to stakeholders. You'll sleep better knowing your charity has a financial buffer.

Book a Free 30-Minute Board Briefing to discuss your reserves strategy and financial sustainability. Book now →

References

[1] Australian Charities and Not-for-profits Commission. (2026). Governance Standards for the Charitable Sector. https://www.acnc.gov.au/