Consider the consequences for your nonprofit if an unexpected event were to deplete your cash on hand. You could be forced to divert funds from essential programs to cover the shortfall. When cash flow is tight or funds are needed due to unforeseen circumstances, an operating reserve fund can help sustain your organization.

Building Reserves

Your first task is to ensure that your organization has a solid foundation by amassing unrestricted net asset balances that you can use to expand current programs and promote the charity’s mission. Your next step is to designate a portion of the unrestricted net assets as operating reserves and set aside these funds for use in emergencies. Reserves can sustain operations during a financial crisis, such as an unanticipated reduction in revenue or a significant increase in operating expenses.

How Much Is Enough?

The amount set aside in an operating reserve will vary from organization to organization; a minimum reserve might be 25% or three to six months of the annual operating budget. Before deciding on an amount, key members of management and the board of directors should evaluate all factors that could affect the organization, including the stability of revenue and expenses, the maturity of the organization, and plans for the future, such as new programs.

The Next Step

Your organization should come up with a plan for building an operating reserve balance. You may decide to set aside a portion of each year’s excess net assets until you achieve your goal. Another option is to wait until year-end to choose an amount based on the organization’s performance that year. The reserve balance that’s appropriate for your organization may change from year to year, depending on your goals and strategy. Make it a priority to evaluate your reserve balance on an annual basis.
Remember that a healthy operating reserve can make your nonprofit attractive to current and potential donors.