Designing a reserves policy for ACNC charities

Most not-for-profit boards know they should hold reserves. Far fewer can answer the three questions a good treasurer — or a sharp ACNC-aware auditor — will eventually ask: How much should we hold, why that number, and what happens when we breach it?

A reserves policy answers those questions in writing, in advance, so the board isn’t improvising during a funding gap. For Australian charities it has become close to non-negotiable: the ACNC expects responsible financial management, major funders increasingly ask to see a policy before they grant, and members rightly want to know their organisation can absorb a shock without cutting programs overnight.

What a reserves policy actually is

A reserves policy is a short board-approved document that sets a target level of free reserves, explains the reasoning behind that target, and defines what the board will do if reserves move above or below it.

“Free reserves” is the key phrase. It is not your total equity, and it is not your bank balance. It is the portion of your unrestricted funds that is genuinely available to spend — after stripping out restricted grants, funds tied up in fixed assets, and amounts already committed. A charity can look healthy on a balance sheet and still have almost no free reserves if most of its money is restricted or sitting in a building.

How much should a charity hold?

The honest answer is “it depends” — but it depends on a small number of things you can actually measure. A common starting point in the Australian sector is three to six months of operating expenditure, and that range is a reasonable default for many small-to-mid charities. The mistake is treating it as a rule rather than a starting point.

Your real target should move up or down based on four inputs:

• Revenue concentration. If one government contract or one major donor funds 40% of your work, you need a deeper buffer than a charity with hundreds of small recurring donors. Concentration is risk.
• Revenue predictability. Recurring memberships and multi-year agreements are stable; event income, appeals and one-off grants are not. The lumpier your income, the larger the reserve.
• Cost flexibility. If most of your costs are people delivering programs on fixed contracts, you can’t cut quickly — so you hold more. A charity that can scale activity up and down can hold less.
• Commitments and lead times. Long leases, loan repayments and notice periods all extend how long you must keep paying before you can adjust.

Work through those four and a defensible number emerges — often expressed as a band (say, four to six months) rather than a single figure, which gives the board room to operate without breaching policy on every normal fluctuation.

Bands and triggers: what happens when you move

A target range only works if it is connected to action. We recommend three bands:

• Below the floor — a defined response: review discretionary spending, pause new commitments, and agree a rebuild timeline. A pre-agreed playbook keeps the response calm and proportionate.
• Within the target band — business as usual, with reserves reported to every board meeting.
• Above the ceiling — a different conversation: is the charity under-investing in its mission? Sustained excess reserves can be a governance and reputational issue, and funders notice. The policy should say how surplus reserves are deployed.

Reserves on paper vs cash in the bank

This is where well-meaning policies quietly fail. A reserve is only useful if it is liquid when you need it. We always pair the reserves target with two simple tests:

• The cash test. Of your target reserve, how much is actually in cash or near-cash you could access within 30 days? A reserve “held” in uncollectable receivables won’t make payroll.
• The runway test. At today’s burn rate, how many weeks of operating costs does available cash cover right now? Reserves answer the strategic question; runway answers the survival one. The board should see both every month.

Restricted vs unrestricted — don’t double-count

Restricted funds — grants and donations given for a specific purpose — are not reserves. They belong to the program they were given for. Your reserves calculation must start from unrestricted funds only. Charities that skip this step routinely overstate their resilience, because grant money sits in the same bank account as everything else. Clean fund accounting — tracking restricted and unrestricted movements separately every month — is what makes a reserves policy trustworthy.

Governance: approval, review and the ACNC lens

A reserves policy is a board document, not a finance-team document. Three things give it authority: board approval, minuted, with the reasoning recorded; an annual review alongside the budget; and disclosure, where appropriate, in your annual report and to major funders. A clearly articulated reserves position is increasingly a competitive advantage in grant applications. The best reserves policies we see are two pages.

The most common mistakes

• Setting a target with no reasoning behind it.
• Counting restricted funds, or fixed assets, as reserves.
• Holding a target on paper that isn’t backed by accessible cash.
• Writing the policy once and never reviewing it as the charity grows.
• Treating excess reserves as a victory rather than a question about mission delivery.

Where to start

If your charity doesn’t yet have a board-approved reserves policy, you can build a credible first version in a single board cycle: calculate your free reserves, work through the four inputs to set a target band, add the two liquidity tests, and define the three response bands. Then put it to the board, minute it, and diarise the annual review. That’s the difference between hoping you have enough and being able to demonstrate — to your board, your auditor and your funders — that you do.