42% of UK charities spent more than they earned in 2023. Learn why reserves matter, how much you really need, and practical strategies to build financial resilience.

If All Income Stopped Tomorrow, How Long Could You Last?

It’s the nightmare scenario every charity leader dreads but few plan for:

Your major funder announces budget cuts. Your largest government contract isn’t renewed. A reputational crisis tanks online donations overnight. A pandemic shuts down your income streams.

How many months could your organisation survive on reserves alone?

For the average UK charity, the answer is sobering: just 2-4 months.

Let me put that in context. The average UK household has savings to cover roughly 3-4 months of expenses. We consider that financially precarious for individuals. For charities — organisations responsible for vulnerable beneficiaries, staff livelihoods, and mission-critical services — it’s borderline reckless.

And it’s getting worse.

The biggest 50 UK charities held an average of 3+ months of reserves in 2017. By 2020, that had dropped to just 2 months. Smaller charities fare slightly better at 4 months, but the trend is alarming across the board.

Meanwhile, 42.6% of UK charities spent more than they earned in 2023 — up from 38.3% in 2022. Nearly half the sector is running a deficit, eating into whatever reserves remain.

And the canary in the coal mine? Charity insolvency cases nearly doubled from 98 to 184 between 2023 and 2024.

This isn’t theoretical risk. This is organisations closing their doors, laying off staff, and abandoning communities that depend on them.

The uncomfortable truth: Most UK charities are one major shock away from existential crisis.

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Financial Resilience in a Volatile Funding Environment

Let’s be clear about what reserves actually are — and aren’t.

Free reserves are unrestricted funds available to meet general charitable expenditure. They’re your buffer, your safety net, your strategic flexibility fund. They’re not restricted grants, designated funds, or fixed assets. They’re the money you could actually spend tomorrow if you needed to.

The Three Critical Functions of Reserves

1. Survival: Weathering Income Shocks

The most obvious function. When a £200k government contract disappears with 30 days’ notice, reserves keep the lights on while you adjust.

Without them? Emergency mode. Staff redundancies. Service cuts. Panic.

2. Strategic Investment: Seizing Opportunities

Reserves aren’t just defensive — they’re offensive. They let you:

Organisations without reserves can’t take strategic risks. They’re forever reactive, never proactive.

3. Donor Confidence: Demonstrating Sustainability

Major donors and institutional funders assess financial health before committing significant resources. A charity with inadequate reserves signals:

Strong reserves signal: “We’re sustainable. We’re well-managed. Your investment is safe with us.”

Why the Sector’s Reserves Are Eroding

The decline isn’t accidental. It’s the result of a perfect storm:

Income volatility: Government funding cuts, economic uncertainty, donor consolidation Cost inflation: 11% inflation in 2022, ongoing wage and operational cost pressures
Demand surge: Communities need more support, not less The deficit trap: 42.6% spending more than earning = reserves depleting in real-time

And here’s the vicious cycle: As reserves decline, organisations become more risk-averse, cutting investment in the very things (fundraising, systems, strategic planning) that could reverse the decline.

→ Read: The Complete Guide to UK Charity Organisational Health

Why “How Much Is Enough?” Is the Wrong Question

For decades, the conventional wisdom was simple: 3-6 months of reserves is healthy.

That guidance came from risk management best practice and was reflected in Charity Commission guidance. Trustees memorised it. Accountants recommended it. Finance committees enshrined it in reserves policies.

Then in June 2023, the Charity Commission updated CC19 guidance and changed everything.

The new position? There is no one-size-fits-all reserve level. Each charity must determine its own appropriate reserves based on:

This is simultaneously more flexible and more challenging. You can’t just copy another charity’s reserves policy. You have to think.

The “Too Little” Trap

Red flags:

Real-world consequences:

A £800k mental health charity with 2 months of reserves loses a £300k local authority contract (37.5% of income). They have 8 weeks to:

They don’t survive. Services close. Staff lose jobs. Vulnerable clients are abandoned.

With 6 months of reserves, they have breathing room to execute an orderly transition: wind down some services, pivot others, launch an emergency fundraising campaign, negotiate contract extensions.

Survival vs closure often comes down to 3-4 extra months of runway.

The “Too Much” Trap (Yes, It Exists)

This one surprises people, but it’s real.

Red flags:

The problem with excessive reserves:

A £2m charity with £4m in reserves (2 years of expenditure) faces difficult questions:

The Charity Commission and sector commentators are increasingly challenging organisations with reserves significantly above operational need. Charities exist to deploy resources for impact, not to build endowments (unless that’s explicitly their model).

So What’s “Right”?

The Goldilocks answer: It depends on YOUR risk profile.

Higher reserves needed if:

Lower reserves acceptable if:

The minimum for most charities: 3 months. The ideal for most: 4-6 months. The maximum defensible: 12 months unless justified by specific strategic purpose.

The Five Reserve-Depletion Patterns

If your reserves are declining, it’s usually one of these culprits.

Pattern 1: The Deficit Death Spiral

Symptoms:

Why it happens: Income didn’t keep pace with inflation. A major funder left. Service demand surged. Whatever the cause, expenditure exceeds income and reserves are the only buffer.

The fix: This is existential. You need a 90-day turnaround plan:

  1. Emergency cost audit — identify non-essential spending
  2. Emergency fundraising push — activate major donors, launch appeal
  3. Service restructuring — what can be paused, scaled back, or delivered more efficiently?
  4. Income diversification strategy — reduce concentration risk

Hard truth: If you’re in year 2+ of deficits, you need board-level intervention. This isn’t an operational problem. It’s a strategic crisis.

Pattern 2: The Investment Starvation Cycle

Symptoms:

Why it happens: Trustees are reserves-obsessive, blocking any spending that reduces reserves even slightly. Meanwhile, the organisation becomes progressively less effective and less able to generate income.

The fix: Reframe reserves as working capital, not sacred hoard.

A £15k investment in a CRM that generates £40k in additional annual fundraising isn’t “spending reserves” — it’s deploying capital for ROI.

Calculate the opportunity cost of not investing:

Present reserves decisions as investment cases with measurable returns, not just expenditure.

Pattern 3: The Hidden Restriction Trap

Symptoms:

Why it happens: Many charities don’t properly distinguish between restricted, designated, and free reserves. You might have £500k in the bank but only £80k is actually available for general use.

The fix: Proper fund accounting and transparent reserves policies.

Your reserves policy should specify:

If your free reserves are inadequate, you need a strategy to generate unrestricted income — this usually means individual giving, unrestricted trust grants, and earned income.

Pattern 4: The Feast-and-Famine Rollercoaster

Symptoms:

Why it happens: Income timing mismatch. You might receive £300k in grant income in April and October but have £50k monthly expenditure. Your annual income covers annual expenditure, but your monthly cash flow doesn’t.

The fix: Cash flow forecasting and reserves management.

Create a 12-month rolling cash flow forecast showing:

This reveals your working capital requirement (the reserves needed just to smooth timing mismatches). That’s separate from your risk reserves.

Solutions:

Pattern 5: The Unrealistic Budget

Symptoms:

Why it happens: Boards approve budgets based on best-case scenarios or historical income without adjusting for current reality.

The fix: Conservative budgeting and scenario planning.

Budget income at 80-90% of “realistic case.” If you exceed expectations, that’s a bonus. If you hit target, you’re ahead of budget.

Run scenarios:

Your reserves policy should specify what triggers what response (e.g., “If reserves fall below 4 months, we implement hiring freeze and launch emergency fundraising campaign”).

From Fragile to Resilient in 36 Months

You can’t build 6 months of reserves overnight. But you can build them systematically over 2-3 years.

The Prerequisites

Before you can build reserves, you need: ✓ Income exceeding expenditure (even by 1-2%) ✓ Clear reserves policy approved by trustees ✓ Board commitment to prioritise financial sustainability ✓ Realistic budget that accounts for reserves-building

If you’re currently running deficits, step one is stopping the bleeding. You can’t build reserves while haemorrhaging money.

Year 1: Stop the Decline (Target: +1 Month of Reserves)

Q1-Q2: Operational Efficiency

Q3-Q4: Revenue Optimisation

Target: Generate 3-5% surplus over expenditure. On a £500k budget, that’s £15-25k — roughly 1 month of reserves for most small charities.

Year 2: Build Momentum (Target: +2 Months of Reserves)

Q1-Q2: Strengthen Fundraising

Q3-Q4: Efficiency Gains

Target: 8-10% surplus. On £500k budget = £40-50k additional reserves (2 months).

Year 3: Reach Target (Target: +3 Months of Reserves)

Q1-Q4: Sustainable Operations

Target: Another £50-60k (3 months). You’re now at 6 months total.

The Income Approach: Reserves-Specific Fundraising

Some charities explicitly fundraise for reserves:

“Sustainability Fund” campaign:

“Your donation today doesn’t just fund services — it builds our resilience so we’ll be here for the next 10 years.”

Major donor pitch:

“We’re seeking a £50k gift to shore up our reserves. This won’t directly fund programmes, but it will ensure we can fund programmes even when income fluctuates.”

Legacy marketing:

“Leave a gift that keeps giving. Legacy gifts strengthen our reserves and ensure long-term sustainability.”

This requires transparent communication about why reserves matter and how they enable mission delivery. Done well, it works — many donors understand that sustainability is a prerequisite for impact.

How to Talk About Reserves Without Sounding Like You’re Hoarding

Here’s the paradox: you need adequate reserves to be sustainable, but donors often perceive reserves as “not needing their donation.”

The Trustee Question

“If we have £400k in reserves, why would anyone donate?”

The answer: Because reserves aren’t for programmes. They’re for resilience that enables programmes.

The analogy: Your personal emergency fund doesn’t mean you’re wealthy — it means you’re responsible. You still have mortgage payments, groceries to buy, and goals to fund. The emergency fund just means an unexpected car repair won’t destroy you.

Same for charities. Reserves don’t mean you’re flush with cash. They mean you can survive income shocks without abandoning beneficiaries.

What to Say in Annual Reports

Don’t say: “We hold £400,000 in reserves.”

Do say: “We maintain reserves equivalent to 5 months of operating costs (£400,000), consistent with our reserves policy. This ensures we can continue serving clients even during funding gaps, invest in strategic improvements, and respond to unexpected opportunities. Our reserves policy requires trustees to review this annually and justify any reserves above 6 months.”

The formula:

  1. State reserves level in months (more meaningful than £)
  2. Explain why that level is appropriate for your risk profile
  3. Link to strategic objectives and beneficiary protection
  4. Demonstrate governance (regular review, clear policy)

The Donor Conversation

When a major donor asks, “Why should I give if you have reserves?”

Response: “Our reserves ensure we can continue the work your donation will fund. Without reserves, a single funding shock would force us to close programmes mid-stream, abandoning the clients you want to help. Reserves are the foundation that makes your impact sustainable.”

Reframe: Reserves aren’t alternative to donations. They’re the prerequisite for making donations effective.

From Risk Mitigation to Growth Enabler

Once you reach target reserves, a magical thing happens: you can take strategic risks.

The Confidence to Invest

With 6 months of reserves, you can:

Reserves = strategic flexibility.

The Negotiating Power

Strong reserves give you leverage in funding negotiations:

Funder: “We can only give you 6 months of funding.” You (with reserves): “That works. We can pilot for 6 months and demonstrate impact for the full funding case.”

vs.

You (without reserves): “We need 12 months guaranteed or we can’t start. The risk is too high.”

Guess which charity gets the grant?

The Crisis Response Capacity

When COVID hit, charities with strong reserves could:

Charities without reserves? Crisis mode from day one. Redundancies. Service closures. Survival focus instead of adaptation.

Reserves are the difference between thriving through disruption and barely surviving it.

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Beyond Boilerplate — A Reserves Policy That Drives Strategy

Most reserves policies are useless boilerplate: “The charity aims to maintain reserves of 3-6 months.”

That’s not a policy. That’s a platitude.

A strategic reserves policy includes:

1. Clear Calculation Method

“Free reserves are calculated as total unrestricted funds minus designated funds minus tangible fixed assets. As of [date], our free reserves are £X, representing Y months of average monthly expenditure.”

2. Target Level WITH Justification

“Our target is 5-6 months (£400-480k) based on:

3. Action Triggers

“If reserves fall below:

If reserves exceed:

4. Annual Review Requirement

“Trustees review this policy annually and adjust target based on changing risk profile.”

5. Communication Statement

“We communicate our reserves position transparently in the annual report, explaining how reserves enable sustainable impact.”

This is a living, strategic document that drives decision-making — not a compliance checkbox.

The Difference Between Surviving and Thriving

42.6% of UK charities spent more than they earned last year.

Insolvency cases doubled.

Average reserves have declined from 3+ months to 2 months.

This isn’t inevitable. This is the result of choices — to prioritize short-term spending over long-term sustainability, to treat reserves as “wasted” money rather than strategic capital, to hope for the best rather than plan for volatility.

The charities that will still be here in 10 years aren’t the lucky ones. They’re the resilient ones — the organisations that built reserves systematically, managed risk strategically, and created the financial foundation for sustainable impact.

Your reserves position isn’t just a number on a balance sheet. It’s the difference between:

Where does your charity stand?

Do you have 2 months of reserves and hope nothing goes wrong? Or 6 months of reserves and the confidence to take strategic risks?

Are you in the 42.6% spending more than you earn, watching reserves evaporate? Or in the disciplined minority building financial resilience month by month?

The sector is in crisis. Your organisation doesn’t have to be.

Take the 5-Minute Charity Health Check — Assess Your Financial Resilience and Get Your Action Plan →

Because hope is not a strategy. But reserves? Reserves are the strategy that makes everything else possible.

FURTHER READING

Explore Teque’s Financial Management Solutions for Charities →