Reserves (and Spending)
General financial reserves are an organisation’s savings.
It is extremely important to understand that general reserves are built up from unspent, unrestricted funding. So, to be clear, unspent money from a ‘restricted project’ (i.e. where funds where awarded to an organisation to be spent on specific program or organisational costs) may not be used to cover other costs, as it is not unrestricted funding.
Reserves take a long time to build up!
Very often, organisations set target levels for their reserves and work hard at reaching this target. In such instances, building reserves (or savings) is seen as an important part of the organisation’s financial planning. Reserves are built up with the intention of providing some cushion should the organisation experience some financial strain, or in the event of the organisation closing down when other costs might need to be covered, such as paying retrenchment packages, terminating lease agreements etc. It is considered good practice for Board members to determine (or designate) how – and under which circumstances – reserves may be spent. Hence, reserves often reflect what is referred to as designated funding – unrestricted funds that are available to the organisation to be spent as planned, or as designated by the Board.
As a general rule, therefore, it is a good idea to keep general reserve funds in a separate bank account so that it can be monitored, guarded and not spent.