In times of financial uncertainty, having operating reserves to protect your nonprofit is essential. These reserves act as a financial safety net, allowing your organization to continue its mission without disruption. Here’s how to build and maintain them effectively.
How to Have Operating Reserves to Protect Your Nonprofit
The first crucial step is to have a formal written policy. Among other things, your policy should set the target amount to hold in a separate fund. Here are other proactive ways to protect your nonprofit.
1. Set a Realistic Goal
A common benchmark for operating reserves is three to six months of operating expenses. Evaluate your nonprofit’s cash flow and risks to determine a goal that suits your needs.
2. Incorporate Reserves into Your Budget
Include a line item for reserves in your annual budget. Treat this allocation as a non-negotiable expense to ensure consistent contributions.
3. Diversify Revenue Streams
Relying on a single funding source can be risky. Develop a diverse mix of revenue streams, such as grants, donations, and earned income, to fund your reserves steadily.
4. Adopt a Reserve Policy
Create a written policy that outlines how reserves can be used, replenished, and managed. This transparency builds trust with stakeholders and ensures disciplined use of funds.
5. Invest Wisely
Store reserve funds in low-risk accounts to preserve capital while earning modest returns. Avoid investments that may jeopardize the availability of funds during emergencies.
6. Regularly Reassess Reserves
Conduct an annual review of your reserve levels against your budget and financial risks. Adjust your contributions if necessary to stay aligned with your reserve goals.
By proactively building operating reserves to protect your nonprofit, you can safeguard your mission and continue serving your community, even during financial crises.
Conclusion
How long it will take to build your operating reserves to protect your nonprofit depends on your goals and resources. But it’s critical to enlist the support of your board and leadership team so that contributions to the reserves fund become a priority. We can help educate decision-makers, as well as advise your organization on an effective operating reserves policy.
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