Quantification of hydrological processes is necessary for management of small reservoirs especially in arid regions characterized by hot climate, scanty rainfall magnitudes and large rainfall variability. This study focuses on estimating inflow and outflow components of a small reservoir situated in arid Kachchh region of Gujarat, India, by developing a water balance model. Daily reservoir water levels were monitored for years 2012 and 2013. All water balance components, i.e. rainwater directly falling into reservoir, surface runoff, irrigation extractions, and evaporation and percolation, were either measured or estimated. Results indicated that rainfall has a fair control on amount of harvested runoff water. In year 2012, meagre rainfall (79 mm) could store 925 m3 of water with 66 cm depth. In contrast, reservoir water levels were at 2.85 m depth in year 2013 with full capacity of 24,879 m3 when rainfall totalled to 291 mm. The mean percolation rate (0.14 cm h−1), determined from 24-h long-term infiltration tests, revealed that full storage will get depleted within 85 days. A major portion (51%) of storage was lost through evaporation and percolation, and only 21% stored water could be utilized for supplemental irrigation. This finding suggested that suitable measures need to be adopted to check evaporation and seepage losses from the reservoirs in arid regions for improved agricultural productivity. Moreover, results of this study may be useful for water resources managers and decision-makers to develop appropriate operational strategies for the reservoirs in the study area as well as in other arid regions of the world.