Free reserves are unrestricted funds available for spending. Because charities can raise funds that are restricted for specific uses, or have endowments or designated funds (set aside for specific purposes by trustees), not all reserves are available to support the core costs of the organisation.
A charity with £1,000,000 in liquid reserves (cash and cash equivalents), of which £500,000 are restricted and £250,000 are designated only has free reserves of £250,000. This means even though the charity may be cash-rich, they may not have sufficient reserves to cover their operational costs without raising additional funds.
Additional considerations include such factors as liquidity, where some unrestricted funds may be tied up in property or other fixed assets. These are not available for spending and so are not a component of free reserves.