The Importance Of Operating Reserves In Uncertain Times
Financial instability can hit your nonprofit at any time. With ongoing budget cuts in Washington, some nonprofits have already lost federal funding, and more may follow. Other risks include the non-renewal of a significant grant or a major donor stopping their support. If you’ve ever had to suspend services and quickly implement Plan B, you know the importance of having operating reserves.
Operating reserves can assist in managing shortfalls. If your nonprofit has low or no operating reserves, consider finding ways to increase them. This article will provide you with essential insight into the importance of operating reserves, how you can begin establishing a reserves policy, and how you can be successful in your efforts to achieve sustaining reserves to help your nonprofit thrive amid uncertainty.
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A Written Nonprofit Reserves Policy
Begin by establishing a formal reserves policy. Aim to set aside an amount equivalent to six months of operating expenses in a separate fund. Consider your risk tolerance and financial situation—greater risk calls for larger reserves. For example, if you rely heavily on a few funding sources, assess the potential impact if one source were to disappear unexpectedly.
Be cautious not to set your reserves target excessively high. Donors and grant-makers typically do not support stockpiling funds that could otherwise be utilized to advance your mission. Your policy should also define conditions under which your organization may access its reserves.
Windfalls & Budget Items
Next, evaluate how you will achieve and sustain your target amount. If donations have increased over the past few years, it might be possible to fund your reserves with unrestricted net assets. Other potential sources include unexpected windfalls, such as large bequests.
Most nonprofits need to include a line item for reserves in their budgets. This amount should not hinder day-to-day operations, but it will help make progress toward the reserves goal. It may be necessary to cut expenses, cancel projects, or divest investments to free up funds.
Exclude illiquid fixed assets, endowments, and temporarily restricted funds. Budget surpluses may not fund reserves as they might be allocated for future expenses.
Enlist Nonprofit Board Support
The time required to build a nonprofit’s reserves depends on its goals and resources. It is essential to gain the support of the board and leadership team to prioritize contributions to the reserves fund. Our nonprofit services team can help provide education for decision-makers and advise the organization on an effective operating reserves policy. Contact a nonprofit assurance professional today to discuss your organization’s goals and objectives.
Check out these additional resources:
Should Your Nonprofit Compete, Collaborate, Or Both?
Using An Exit Agreement To Manage Your Nonprofit’s Leadership Transition
What Nonprofits Might Expect From The Change Of Control In Washington
