Operating reserves – building capacity to survive a drought
From the National Council of Nonprofits
When a charity watchdog group recently downgraded a nonprofit for spending its reserves, there was a hue and cry. Points were taken off because the nonprofit did not have “enough” reserves set aside. Should a nonprofit that purposefully funds programs, knowing that its reserves will dip below a three months’ supply, be chastised for “not having enough” reserves? Or should it be celebrated for having reserves to spend in the first place?
Operating reserves – or the lack of them – needs to be part of the conversation about financially healthy nonprofits. Ideally every nonprofit board will set aside assets that can be used when expected revenues fall short. When government funding is delayed, an unexpected expense arises, or revenue takes an unpredicted dip, a reserve fund can smooth the cash flow. The problem is, not enough nonprofits have an operating reserve.
It was sobering to see the survey findings published by the Nonprofit Finance Fund that, of more than 1,900 nonprofits surveyed, 28 percent reported that they had one month or less of operating cash. That statistic sounds a warning bell that too few nonprofits have enough in their “rainy day” fund to carry them through challenging times.
Does your board understand the need for operating reserves? Could it use some help implementing a policy?
