Just like an umbrella shields you from unexpected rain, a well-planned reserve fund can protect your organisation from financial surprises. But like an umbrella, reserves can be fragile.

Here are 10 practical tips to help you build and manage strong financial reserves, helping your organisation to stay stable and ready for whatever comes its way.

1. Leveraging surpluses

Surpluses, where income exceeds expenditure, are the perfect opportunity for generating reserves. Sustainability or contingency reserves should be built from unrestricted income, including active (consulting fees, rental, sale of products) and passive (interest, dividends and market gains) self-generated income, unrestricted donations, or specific donations obtained for a reserve.

2. Strict policies

Policies should be established, documented and communicated to everyone to show how reserves may be used. Especially important is the purpose of reserves and that usage should be approved by the board, to maintain financial discipline. It is too easy to borrow from reserves and not pay back!

3. Smart annual budgeting

Depending on reserve usage policies, consider using some of the reserve to fund part of budgeted expenditure, such as an unfunded line item, a new unfunded or partially funded strategic initiative or opportunity that requires co-funding. Allowing a sustainability or contingency reserve to slip into funding annual gaps without planning is how the wind can blow our umbrellas away.

4.  Reserve size

Organisations should set a target reserve value. We have seen organisations consider covering months or even years of committed or full operational costs, retrenchment packages and costs of winding down an organisation, and growth plans for the next 3 years. A minimum of 3 months of committed costs is the usual standard. Consider risk factors - the less predictable your income, or the more fixed your costs, the larger your reserve should be.

5. Investment of funds

Maximise the return on the reserves. Consult with an investment advisor to manage the reserve funds and have the board regularly review investment performance with the support of the advisor.

6. Ringfencing reserves

Avoid the “oops” moments by keeping your reserves clearly separated from operational funds. It’s vital to know where your funds are, both physically and on your balance sheet. That way, you’ll stay organised and avoid accidental spending.

7. Endowment funds

Explore funding for an endowment, with the aim of accessing only some of the interest to grow reserves. By only tapping into part of the interest generated, you’ll safeguard the principal and protect it from inflation—allowing your reserves to continue growing for years to come.

8.  Fixed asset reserve

For organisations with significant fixed assets, create reserves equivalent to the value of these assets. Accumulated funds will look available when they are actually tied up in the value of these illiquid assets, which are usually needed by the organisation to operate. Showing an equivalent fixed asset reserve fund balance on our balance sheet will ensure that the right financial health message is communicated. This is different from an asset replacement or maintenance reserve, as this will need to be in addition to the existing value of the assets.

9.  Restricted funds

While usually reflected as a deferred income liability at year-end, these are also a type of reserve. Respect the strings attached by ensuring that restricted funds from donors are carefully tracked and not misused, as they will need to be repaid if not spent as specified. This includes being incredibly careful about borrowing from one pot of donor funds for another’s expenses, which effectively uses another donor’s funds without permission as a contingency reserve.

10. Clear disclosure to stakeholders

Good financial governance builds trust, so make sure your stakeholders know about your reserve policies and balances. Include these details in your financial statements and funding proposals. It’s a great way to show accountability and reassure funders that their contributions are being managed wisely.