Does Your Nonprofit Have A Healthy Reserve Fund?

June 29, 2012

The loss of a major funding source. Emergency expenditures. An opportunity to respond to a constituent’s crisis.

These are a few reasons why your organization needs to have a pool of unrestricted cash available for immediate use – a reserve fund.

The reality is that nearly 3 in 10 nonprofits have one month or less of cash on hand to cover operating expenses.

That’s according to the 2011 Nonprofit Finance Fund survey of nonprofits. At the same time, 78 percent of the nonprofits surveyed saw increased demand for their services, which underscores just how vital they are to the communities and clients they serve.

Many nonprofit organizations don’t consciously include reserve planning in their fundraising efforts. The focus is on bringing in enough money to cover program expenses. Any excess is regarded with suspicion as “a profit.”

In reality, the definition of nonprofit means that excess funds are not distributed back to shareholders or owners, but rather reinvested in the organization’s mission.

Of course, most grants require that all funds be spent on specific programs or returned, so reserve funds need to be raised from unrestricted sources.

The first question is: How big should the reserve be?

Many experts talk about an amount equal to three or six months of operating expenses. But the size should be tailored to your specific needs.

For example, if you own a building, you need to have a capital reserve for unexpected repairs, such as a furnace malfunction or burst pipe. Funds for insurance deductibles should be put aside whether you rent or own and for company-owned vehicles.

In calculating operating reserves, trends and history regarding revenue sources should be examined. Organizations with a good supply of fee-paying clients or consistent, committed donors are more stable than those relying on a few large grants.

How quickly can new revenue sources contribute, if needed?

In some cases, the lag period between application and award can be six months. Close relationships with supportive foundations can be a lifesaver during a crisis, when they may allow you to apply for operating funds. Many did so during the recent recession.

Keep an eye on trends with long-term funding sources, whether foundation or government. If they cut back 10 or 20 percent, what would be the impact on your organization?

Essential and nonessential personnel and costs must be identified as part of the reserve equation. If a crisis struck – such as 9/11, which decimated funding to many nonprofits for an extended period – how much would it take for you to keep your doors open?

This amount, coupled with the responsiveness of new funding, will give you an idea of how large your fund should be. Once this is determined, present the information to your board for creation of a reserve fund policy and plan.

Reserve funds can be raised in several ways:

• A portion of unrestricted donations can be set aside.
• A deliberate campaign approaching donors and foundations for this purpose can be launched.
• Targeted fundraisers can be held.
• Organizational efficiency can be maximized, and an effort made not to leave opportunities on the table.

For example, one organization never bothered to obtain an approved indirect rate for government grants, which meant no overhead costs were allowed. If 10 to 30 percent of grants could cover overhead costs, that would free up the unrestricted sources presently paying for them.

Plan your reserve fund strategy now so you can keep your organization operating when your clients need you most.