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How Much Should a Charity Hold in Reserves? A Governance Guide for Boards

"How much should we hold in reserves?" is one of the most common questions charity boards ask. The honest answer is that there is no single right number. The ACNC says so directly: the right level depends on your charity's own risks and circumstances.

That makes reserves a governance decision, not just an accounting one. This guide explains how boards can reach a sensible target, the legal duties that sit behind it, and the records you need to justify your decision.

If you need a policy document, see our companion [NFP reserves policy template guide](/insights/nfp-reserves-policy-australia).

Quick Summary

• Reserves are funds set aside for unexpected costs or income shortfalls. Restricted funds, land and other fixed assets are generally not counted.
• The ACNC does not set a required level. Each board decides based on its own risks.
• Responsible People must manage finances responsibly and must not let the charity operate while insolvent (ACNC Governance Standard 5).
• Holding too little is a risk. Holding too much without a reason can also draw questions from funders and regulators.
• Record how you set your target, and review it at least once a year.

Why reserves are a governance issue

Under ACNC Governance Standard 5, your Responsible People (usually your board members) must act with reasonable care and diligence, oversee the charity's finances responsibly, and not allow the charity to operate while insolvent.

A reserves policy is one of the clearest ways to show you are meeting those duties. It shows the board has thought about what could go wrong, how much money would be needed to respond, and how that money is protected.

What counts as reserves

The ACNC's guidance uses "reserves" to mean operating reserves: unrestricted funds available to meet unexpected costs. It generally excludes:

• restricted funds, such as unspent grants tied to a specific purpose
• land, buildings and other fixed assets
• revaluation reserves

This matters. A charity can look wealthy on its balance sheet but have very little that the board can actually use in an emergency.

Three ways to set a target

There is no required formula, so many boards use one or more of these approaches.

1. Months of operating costs

Calculate how many months of essential costs your reserves would cover. This is simple to explain to donors, but it treats all costs and risks the same.

2. Risk-based assessment

List your main financial risks, estimate the cost of each, and set reserves to cover the most likely combination. Examples include:

• losing your largest grant or contract
• a delay in government funding payments
• a fall in fundraising income
• staff entitlements payable if a program closes
• an urgent repair to a building you rely on

3. Wind-down cost

Estimate what it would cost to close programs safely, meet commitments to clients, and pay staff entitlements. This sets a minimum floor for reserves.

Many boards combine the approaches: a risk-based target, checked against the wind-down floor.

Holding too much

Reserves well above your stated target can raise questions. Funders may ask why they should give money you do not appear to need. The ACNC notes that boards may need to justify high reserves, or spend some of them on the charity's purposes.

If you hold more than your target, record why. Examples include a planned building project, or a known funding gap in future years.

The records you need to keep

Your reserves decision is only as strong as the records behind it. The ACNC requires registered charities to keep financial and operational records for seven years, in English or a form that can be readily translated into English. Financial records must explain how the charity receives and spends money, and its financial position and performance.

For reserves, keep:

• **Board minutes** recording the target, the method used, and the reasons
• **The calculation** behind the target, with the assumptions dated
• **The approved reserves policy**, with its review date
• **Monthly or quarterly reports** comparing actual reserves to target
• **Approvals** for any use of reserves, and the reason
• **A clear split** in your accounts between restricted funds and free reserves

The ACNC's 2025-26 regulatory focus is record keeping. Good records are your evidence that the board has made a careful, informed decision.

Questions for your next board meeting

1. What is our reserves target, and how did we calculate it? 2. How much of our cash is restricted, and how much is truly free? 3. When did we last review the target against our current risks? 4. Who can approve use of reserves, and what is the process? 5. How do we explain our reserves level to funders and the public?

Frequently Asked Questions

Q: Does the ACNC require a minimum level of reserves? A: No. The ACNC says there is no single level of reserves that suits all charities. Each board should assess its own risks and decide.

Q: Do restricted grants count as reserves? A: Generally no. Restricted funds must be used for their specific purpose, so they are not available to meet unexpected costs.

Q: How long must we keep records of reserves decisions? A: The ACNC requires registered charities to keep financial and operational records for seven years.

The Bottom Line

A reserves target is a board judgement, backed by a clear method and good records. Set it based on your real risks, separate restricted funds from free reserves, review it every year, and document every decision.

Official guidance

• [ACNC: Charity reserves, financial stability and sustainability](https://www.acnc.gov.au/tools/guides/charity-reserves-financial-stability-and-sustainability)
• [ACNC: Governance Standards](https://www.acnc.gov.au/tools/factsheets/small-charities-library-acnc-governance-standards)
• [ACNC: Record keeping](https://www.acnc.gov.au/tools/topic-guides/record-keeping)

The ACNC notes its reserves guidance does not apply to grant-making charitable trusts and foundations that manage a corpus. This article is general information only.

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