Mattress or Springboard - the role of Reserves.

‘Reserves should be a springboard, 

not just a mattress’

I’m not sure where I heard this phrase, but it has stuck in my head ever since as a good one.

In difficult times, it’s natural to focus on the ‘mattress’ role of reserves’; that they can provide some assurance when the world outside is challenging. This may explain the historic focus on ‘months of expenditure’ as their default measure.

This metric can be useful for benchmarking purposes, as in the work I do with Hospice UK. But it can create the illusion of prudence while obscuring the real questions about risk, liquidity, and adaptability that should be at the heart of a reserves strategy. This was the conclusion reached at a session  of the Virtual Hospice Finance Directors Group.

The weaknesses in the ‘months of’ approach

1. It assumes all spending is equally essential.

A flat “x months of total costs” doesn’t distinguish between core delivery and more discretionary projects. If your reserves plan assumes you’ll continue spending evenly across the board, you’re probably over-estimating what you need to protect the organisation’s critical functions.

2. It treats all income streams the same. 

Crises never arrive as a uniform fall in all income streams concurrently. They tend to be jagged: some revenue lines drop suddenly, others hold steady. The pandemic bore this out. A reserves policy based on monthly averages tells you nothing about the timing or profile of cash pressures when things go wrong.

3. It confuses liquidity with security. 

Some charities include all investments in their ‘free reserves’ calculation. But if those assets can’t be realised quickly, their value in a crisis is limited. A better question is not “how many months’ spending do we hold?” but “how much genuinely liquid resource could we access within, say, 100 days if we had to?” 

4. It creates false confidence or misplaced caution. 

Once a charity has adopted a months-based target, the number itself can become the focus of board conversations: are we above or below target? Yet that number may bear little relationship to the organisation’s actual financial dynamics. 

5. It overlooks opportunity cost. 

Reserves are meant to be used to strengthen resilience and enable adaptation. Hence, the relevance of the ‘springboard.’ In challenging times, there may still be opportunities to invest in income generation to help create a better future. 

A better way to think about reserves

There’s no single formula, but there are more intelligent approaches that align reserves with risk, liquidity and strategy.

Start with risk scenarios, not ratios.

Map out the realistic financial shocks your hospice could face; loss of a key major funder, a delay or decline in legacy income, changes in commissioning, etc. Model their likely duration, cash impact and mitigation options. Then base your reserves requirement on that analysis, not a multiple of monthly spend.

Segment your reserves by purpose and liquidity. 

Distinguish between what’s immediately available, what can be obtained in the medium-term and what’s designated for specific strategic risks. This helps boards understand not just how much you hold, but how fast it could be mobilised.

Set ranges, not fixed targets. 

Define an operating range to keep within, not an absolute figure, with agreed triggers for review if projections show that you are likely to fall below or exceed those boundaries. This keeps the focus on trend and rationale, rather than a single number.

Integrate reserves into strategic planning. 

Reserves should be an enabler of strategy, not an insurance policy against failure. Ask: how could our reserves help us pivot, invest, or seize an opportunity when external conditions shift? Viewing them this way turns a static balance sheet item into a lever for organisational agility.

Review and stress test annually. 

Run a stress test that combines multiple adverse scenarios – income shocks, cost inflation, working capital pinch points – to test whether your reserves and cashflow could cope. Use the results to update your policy.  

The takeaway

It’s time to move towards a reserves policy that genuinely reflects your hospice’s risk appetite, liquidity profile and strategic intent. Not one that is based around ‘how many months could we survive?’ And probably gives you the wrong answer anyway.