Many nonprofits make the mistake of looking at having cash reserves on hand as a luxury instead of a necessity, when in fact, keeping reserve funds set aside for unforeseen circumstances is a trait of many healthy nonprofits. A 2018 report by the National Council of Nonprofits found that nearly 10% of nonprofit organizations have less than 3 months of operating reserves on hand—a surprising figure considering how quickly things could go sideways in a matter of 90 days.
This article will explain what a reserve is, describe some of the benefits of keeping a reserve, and share recommendations when it comes to putting cash in reserve accounts.
What Is a Nonprofit Reserve?
Also known as an operating reserve, it is a financial safety net set up to protect the organization against unexpected expenses or losses. Having cash reserves to rely on when things are financially challenging can help a nonprofit stay afloat until the waters become less choppy.
Benefits of Having Operating Reserves for Your Nonprofit
There are quite a few perks to keeping an operating reserve. Here are some of the primary benefits:
- Protection against the unknown
When it comes to the unpredictable, it’s not a matter of if you are going to face stumbling blocks, but when. Having a reserve in place protects your nonprofit against unpredictable financial obstacles you may face along the way, giving the staff and board members peace of mind.
An operating reserve allows your nonprofit to have options that a cash-strapped organization with no reserve may not be able to capitalize on when an opportunity arises that will help your nonprofit further its mission.
- Fiscal responsibility is attractive to potential donors
Many individuals and groups looking to donate funds will want to review financial statements and get a good idea of the overall health of your nonprofit. Being able to showcase a robust reserve lets these potential donors know that your organization is accountable and serious about fulfilling its mission.
How Much Money Should a Nonprofit Have in Its Reserve Funds?
Every nonprofit operates differently based on its respective situation, and this is especially true when it comes to finances. That being said, most nonprofits that have an operating reserve practice the general rule of thumb, which is to set aside three to six months’ worth of operating costs. For many nonprofits, six months may not be realistic, so it is recommended that you have a discussion with your board members about a reserve goal that would work best for your nonprofit’s finances and circumstances.
Are There Any Legal Limitations When It Comes to Operating Reserves?
While nonprofit organizations do need to operate in a very transparent manner when it comes to the way money is managed and spent, the federal government does not scrutinize or place any limitations on operating reserves as long as all funds are being used to achieve the mission of the nonprofit.
Financial Reserves and Private Foundations
Even though private foundations are classified as nonprofit organizations, they do not have as much legal flexibility as standard nonprofits when it comes to reserves. Be sure to research laws related to private foundations and operating reserves, and seek out legal advice if needed.
How to Set up a Nonprofit Operating Reserve
Setting up a reserve for your nonprofit may seem complicated, but the overall process is relatively simple. Here are the steps needed to set up an operating reserve:
- Meet with board members to clarify how and when the reserve will be used. It is imperative that everyone is on the same page when it comes to this.
- Draft a set of rules detailing how the reserve will be handled by all members of your nonprofit. (You can see an example here.)
- Set up an account where the reserve funds will be deposited and stored.
Tools To Help Nonprofits With Financial Management
Needless to say, managing the finances of a nonprofit can be challenging and time-consuming. Juggling the many accounting duties that need to be performed, along with managing and hosting fundraising events, creating and overseeing the budget, and all of the other responsibilities that come with accomplishing your mission can be overwhelming.
Fortunately, Aplos has come up with a solution that can handle all of those tasks and more. It was created specifically with the unique needs of nonprofits in mind, and is currently the accounting software choice of over 40,000 organizations.