How much cash should charities hold?

The question of how much cash to hold may not be as simple as it at first appears. Getting the answer right depends on good governance, a solid understanding of risk – and an awareness of the charity’s legal obligations.

Gettyimages 697853664 WEB
Adrian Wild
Published: 01 Nov 2017 Updated: 13 Jun 2022

The question of how much cash to hold may not be as simple as it at first appears. Getting the answer right depends on good governance, a solid understanding of risk – and an awareness of the charity’s legal obligations.

Money Savings 700607326

Charities may have a range of sources of income, including investments in a portfolio, income from property, government grant, and donations and legacies. Accumulated cash – which represents unspent past income – can be used to fund future expenditure – for example a major project or to permit services to continue when current income falls short of requirements.

Charity trustees have a legal duty to act in the charity’s best interests, manage the charity’s resources responsibly, and act with reasonable care and skill. According to the Charity Commission for England and Wales, trustees who act in breach of their legal duties can be held responsible for consequences that flow from such a breach and for any loss the charity incurs as a result. The Commission has the power to disqualify individuals from trusteeship if they feel this is warranted.

Taking stock of charities

To work out how much cash to hold, it is necessary to consider the charity’s operating expenses, any investment portfolio (particularly if it contains cash separately to that held as working capital), sources of income and the extent of future obligations. The right level of cash will depend on how the charity funds its activities.

For example, a charity that receives rental payments from the properties it owns (houses, buildings, land, etc.) will receive a regular income and therefore may not need to hold a great deal of cash in reserve; conversely, a charity that is funded by donations may have sporadic and unpredictable income and would be expected to hold higher cash reserves. Similarly, a charity that is undertaking a capital project (for example, refurbishing a building used by its beneficiaries) would also need a higher cash allocation to the project.

Figures provided by the Charity Finance Charity 250 Index suggest that charities that have strong governance (including appropriate cash allocation) can expect strong results. In the most recent numbers available, which cover the year to 30 June 2016, the Index reported that over a third of its members experienced double-digit income rises. The largest rise was recorded by Horder Healthcare, with income up by 19% to £29.9 million over the same period.

The Commission expects trustees to implement and monitor a reserves policy; trustees are also expected to explain the policy and compliance with the policy on an annual basis. Reserves are defined by the Commission as ‘unrestricted funds that are freely available to spend on any of the charity’s purposes’ (generally referred to as “free reserves”). These differ from restricted reserves such as endowments. In general, free reserves would be expected to be largely represented by cash or near cash (such as low risk listed investments which could be readily converted to cash).

Some charities may receive ‘lumpy’ or unpredictable income, such as legacies arising from a death or an annual grant. Trustees should take this into consideration and remember that a charity’s expenses will typically be regular, so maintaining sufficient cash in reserve to meet periods of reduced income is paramount, especially if the charity is providing life-affecting services.

“Deciding the level of reserves that a charity needs to hold is an important part of financial management and forward financial planning,” notes the Commission in its Charity reserves: building resilience document published in January 2016. “Failure to do this may result in reserves levels which are either higher than necessary, limiting the potential benefits a charity can provide; or too low, increasing the risk to the charity’s ability to carry on its activities in future in the event of financial difficulties, and increasing the risks of unplanned and unmanaged closure and insolvency.”

Ultimately, good governance and oversight are a key part of ensuring that a charity serves the best interests of its intended beneficiaries. Whether holding a large amount of cash or a little, the first step should be to consider whether that sum is appropriate to its needs. If not, trustees should take further action to redress the balance, either by moving any surplus cash to where it can generate the most benefit, or by taking steps to ensure that sufficient cash is gathered to safeguard the charity’s operations for the foreseeable future, for example, by cutting costs or fundraising.

Find out more about our charity investment management service


By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.