I Have Some Reservations: A Nonprofit’s Guide to Financial Overages
For nonprofits without specialized accounting personnel, the budget discussion often ends with the annual budget. Numbers are carefully monitored and dollars accounted for, but in a fairly vague way. But what if something positively disrupts this balance--say, a large donation from a generous donor’s estate?
So exciting is this idea that many nonprofit leaders haven’t even given it much thought, and speculate that the easy answer is putting the money into a reserve to allow funds for a rainy day or other “to be determined” emergency. Frequently, a reserve is a place for money with no specific purpose to go, and there isn’t a specific plan for what happens to it.
Why have a reserve?
Reasons for financial reserves might vary between organizations, but most have them for one of three reasons. The first is that money can be unexpectedly needed to replace things or even to repair them. Especially in this age of technology, equipment breaks. Buildings atrophy, air conditioners break, and plumbing needs repaired--and all require cash on hand.
The second reason for a financial reserve is uncontrollable external factors, like the loss or delay of a grant, a donor withdrawing support, or the failure of a historically successful event. Finally, organizations have reserve funds to help with future strategy. This can include expanding the organization’s footprint by hiring new staff, etc.
It’s difficult to put hard numbers on how much money a nonprofit organization should have in these three categories, mostly because organizational purposes and budgets vary so greatly. A financial reserve that covers three months of expenses is helpful, but how exactly might an organization spend it? There are always different obligations, commitments, and risks.
Why this is dangerous
Talking about reserves in vague ways makes it easy not to save for them. If you aren’t sure how your money will be used or when, it is easy to misspend or fail to save. Answering questions about why, when, and what if scenarios can help ensure you have the correct amount of savings for your nonprofit organization to achieve your goals.
While you should maintain a reserve fund, it will serve you well to outline your goals for saving and your requirements for use. While unexpected things can and will happen, we’re smarter with our money when we’ve considered a scenario before.
Reserves are necessary, but they should come with careful consideration. By working with a nonprofit accountant or other financial planner, you ensure that your organization is set up to succeed in accomplishing the goals you set out to achieve.