Is Your Nonprofit 3 Months from Disaster?
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An operating reserve is your nonprofit's "rainy day fund" for when its cash flow unexpectedly drops. Conventional wisdom says that three to six months' worth of operating expenses should be in your reserve. Yet survey after survey continues to show that as many as 50 percent of nonprofits have three months or less in reserves -- a highly risky financial position to have when the economy is still volatile and foundation giving is predicted to grow slowly for the near future.
So how much should your nonprofit have in reserves? How do you build them up?
- Myth: Nonprofits cannot make profits. In fact, surplus is needed to avoid operating at a deficit.
- How much to keep in reserves varies with each nonprofit and its cash requirements, long-term strategies, business plan, and risk tolerance. Orgs that have debt, property that requires maintenance, government contracts, or under-resourced populations may need larger reserves. Rodney: "Any surplus is better than breakeven or no surplus...any reserve is better than no reserve. More than one month is best!"
- Build a reserve by planning to generate more income than you pay in expenses, then monitor finances to ensure a surplus.
- Reserve is different - and more important to have - than an endowment.
- Orgs need to be ready to educate funders/donors about why reserves are vital for good financial health.
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Alice Richardson Antonelli, Senior Consultant, Nonprofit Finance Fund: Alice joined NFF in 2002 and is responsible for leading consulting services initiatives, including: playing a lead role in the delivery and product development of NFF’s full range of consulting services; cultivating and managing client relationships; and teaching workshops and seminars.
Rodney Christopher, Vice President, Consulting Services, Nonprofit Finance Fund: Rodney has worked for NFF from 1992 to 1996 and again since 2001. As one of NFF's most broadly experienced team members, Rodney's clients are both nonprofits and foundations, and he divides his time between custom engagements, client coaching, public presentations, product development and training NFF staff. Read more...