Does Your Not-for-Profit Have an Operating Reserve?
January 23, 2017
By Brian Collins, CPA
Is your not-for-profit taking the necessary steps to prepare for the next economic down turn? Can your not-for-profit handle unexpected decreases in funding or unbudgeted operating expenses? If you answered no or are unable to answer either of these questions, it is likely that management and the board of directors of your not-for-profit have not had a discussion about an operating reserve, and need to add that discussion to the agenda of an upcoming board meeting.
An operating reserve is defined as a portion of unrestricted net assets that the board of directors designates to act as such. The operating reserve can be thought of as an internal line-of-credit that the organization can use when unanticipated and unbudgeted events occur.
Many directors ask “How much of an operating reserve should my not-for-profit have?” An appropriate operating reserve balance may be different for each organization. Take into consideration internal and external factors that could have impact on the organization. A general rule many use for their not-for-profit’s operating reserve is to have enough to fund 3 to 6 months of the annual operating budget.
The board of directors may want to consider adopting an operating reserve policy to set goals for the reserve, and terms and conditions of the reserve’s use.
A healthy operating reserve can provide some stability for your not-for-profit during unexpected financial emergencies. It also may provide evidence that the not-for-profit has a sustainability plan, which can be attractive to potential funders and could possibility lead to additional funds.