Since it is perfectly acceptable for a nonprofit to make a profit throughout the course of a year, the question often asked is, “how much should be left in reserves?” The answer is tricky. Having excess reserves can limit your donors’ willingness to give and having too little could cause your nonprofit to struggle operationally if something catastrophic were to happen.
A Nonprofit “Rainy Day Fund”
There are three main reasons a nonprofit should have a rainy-day fund: Unexpected events, repair of assets, and future planning.
- Unexpected event – any occurrence that is out of your control and ends up draining budgetary funds. For example, a low-performing fundraising event, delays in grant rewards, or the disappearance of an expected sizeable annual donation.
- Repairs – like your own home, the building that houses your charity might need repairs. Your staff need new computers, the HVAC breaks down, or water leaks onto carpeting. While your budget should allow for surprises, sometimes it is not enough.
- Growing into the future – having reserve funds can help any organization change with their changing community and can also lead to new programs as well as expansion of services.
How Much Should Be in Reserve Funds?
There is no perfect answer to the question of how much you should hold in your reserve. This answer will vary from organization to organization. The decision should be made by your board of directors based on financial statements and projections. A common rule of thumb is to ensure you have 90 days of funding saved in reserves in order to cover payroll and bills should the unexpected happen.
An organization that is grant-dependent may have less in reserves than one relying on fundraising events and donors for their funding because of the variability of event revenue and anticipated contributions. It is important to involve your accounting professional and board in setting aside an appropriate amount for your organization.
The Pitfalls of a Large Reserve Fund
The most concerning issue nonprofits with large reserve funds will have is that potential donors may decide to give their contribution to another charity. For some donors, seeing a large reserve fund is a “turn off”. They feel an organization should be using the money they have instead of asking for more. This is especially true when requesting donations for a certain need that has not been met but yet there is a large sum in reserves.
There are also IRS ramifications if a reserve fund is too high. Those are detailed here.
Having a reserve fund that fits your organization’s needs is a process that requires the board and management working with your accountant to determine a reserve fund goal and policy.
Balance is the key in determining how much to hold for the future and what is needed to support programming and operations today. Numbers 4 Nonprofits can help with this process. Contact us today and tell us your story!