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Plan For The Unknown With An Operational Reserve

Many non-profits are worried about high inflation and the possibility of another recession. All this after COVID-19 hit many non-profits’ finances and operations. Focusing on growing your operating reserves might help save your non-profit from upcoming turbulence. Even if it’s only a seemingly small amount of funds, the cushion might be beneficial in the long run.

A Policy To Help Weather Storms
Strong reserves can help non-profits survive unexpected financial blows (or, in better times, take advantage of sudden opportunities). Review the short- and long-term risks your organization faces. For example, is it heavily reliant on a handful of funding sources that, if cut off or reduced, would jeopardize its future?

If your organization doesn’t already have a formal written reserves policy, develop one now. And, if it does, review the policy to see how it holds up considering the past three tumultuous years.

Among other things, your policy should set the target amount to hold in a separate fund. Although no universal benchmark applies, most organizations should set aside six months of operating expenses. Your leadership’s risk appetite and your current financial position may dictate a lower or higher target. Avoid setting the target too high, though. Donors and grantmakers generally don’t favor stockpiling of funds that could otherwise be used to pursue your mission. Also, your policy should establish triggers for when your organization can dip into reserves.

A Plan For Funding
Assuming your current reserve level falls below the target, develop a plan for getting it back on track. If you’ve received increased donations over the past couple of years, you might be able to fully fund your reserves with unrestricted net assets. Or use large bequests or unexpected windfalls.

Most non-profits, however, need to include a line item for contributions to the reserves in their budgets. This amount shouldn’t hinder day-to-day operations, but it will help you begin to make real progress toward your reserves goal. It may be necessary to cut expenses, cancel projects or divest investments to free up funds.

Remember to leave illiquid fixed assets (buildings and equipment), endowments, and temporarily restricted funds out of the equation. Similarly, budget surpluses aren’t necessarily available to fund reserves because they might include funds already earmarked for future expenses.

Be Patient
Building or replenishing operating reserves takes time and your stakeholders must understand that it’s an ongoing, long-term project. In general, it takes several years to build months of reserves, and that’s if everything goes according to plan. If you’re having trouble finding funds for your operating reserves, contact us. We can analyze your financial situation and recommend solutions.

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