What Every Nonprofit Finance Committee Should Know About Operating Reserves - What are operating reserves, why are they important, how do you get them.

1.
What Every Nonprofit Finance
Committee Should Know about
Operating Reserves

2. What Every Nonprofit Finance Committee Should
Know about Operating Reserves
The topic of operating reserves doesn’t get the airtime it should in most
finance committee meetings. I’ve sat in on and read through countless
finance committee meeting minutes and it just isn’t given much weight even
though most nonprofits are operating in an environment where sudden and
‘unexpected’ losses of income have been more and more ‘expected’.
Here is why…
• Committees fail to have meaningful detailed discussions about finances
in general and therefore reserves.
• Committee members have different ideas of what operating reserves
actually are, creating obstacles to any conversation.
• Common misconceptions about operating reserves among Committee
members as well as management and executives further muddy the
water.

3. What’s the big deal anyway?
“Early in the economic downturn, the Meyer Foundation paid for an Urban
Institute study of 2,500 locally focused nonprofits in the Washington region.
The researchers found that nearly 60 percent of the organizations
examined had reserves totaling less than three months’ worth of operating
expenses—a level generally cited as the minimum level of reserves any
organization needs. And 28 percent had no reserves at all.
The consequences of not having operating reserves can be dire. At the very
least, nonprofits without reserves face cash‐flow problems if a grant
request is unexpectedly declined or a government agency falls behind in its
contract‐reimbursement process. Cash‐flow problems distract an
organization’s managers and demoralize its employees, especially if the
organization misses payroll.
If cash‐flow problems persist, they compromise and eventually erode an
organization’s ability to fulfill its mission.”
Rick Moyers, Against the Grain, Philantrhopy.com

4. What you need to know
• What operating reserves are
• How you get operating reserves
• That it is not wrong to accumulate reserves

5. What are operating reserves?
Operating reserves are unrestricted/undesignated assets that can quickly
be converted to cash that an organization can use to support its operations
in the event of cash shortfalls caused by unbudgeted decreases in revenue
or increases in expenses.
What are operating reserves are not.
• Endowment funds – These are restricted and can only generate
investment income to be used by the organization.
• Equity in a building – Though presented as a part of unrestricted net
assets it cannot be readily converted into cash.
• Cash on hand – ‘Months of cash in the bank’ is not an operating reserve
and often has restrictions or designated uses inherently attached to it
already.
“Operating reserves are savings accounts—and organizations should have
reserves for the same reasons that people should have savings: to serve as a
cushion against unexpected but necessary expenses or a sudden loss of
income and to build up money for long‐term goals and future plans.”
Rick Moyers, Against the Grain, Philantrhopy.com

6. How do you get these operating reserves?
Simple… fiscal discipline and unrestricted revenue.
Building an operating reserve must be prioritized over dumping any extra
money and unrestricted surplus immediately to expand programs and
services which is commonplace when times are good.
If an organization is able to bank away 5% of its budget a year, the
minimum reserve balance would be reached in about 5 years.

7. Yes, I know you are a ‘Nonprofit’
The common perception of accumulating surplus is that there’s a penalty—
either legal or psychological. This is not true.
“The U.S. Better Business Bureau’s Wise Giving Alliance, which assesses
whether national organizations are in compliance with its Standards for
Charity Accountability, does state in those standards that charities should
“avoid accumulating funds that could be used for current program
activities.” However, to meet that organization’s standards, a nonprofit can’t
have operating reserves totaling more than three years of current operating
expenses.”
Nevertheless, many executives and committees think that accumulating
surplus is ‘frowned upon’ for a nonprofit.

8. The Topic of Operating Reserves Deserves Your
Attention
The fact is most foundations want to support organizations that are
managed well. This includes budgeting small surpluses and reasonable
operating reserves.
“However inaccurate these misconceptions may be, they are firmly
ingrained into the culture of the nonprofit sector. The result is that far too
many organizations operate hand‐to‐mouth with no margin for error and
no ability to cope with unpleasant financial surprises. Ultimately, this is a
disservice to clients who depend on organizations for services, employees
who depend on organizations for their livelihoods, and communities that
need stable organizations that can survive in difficult times.”
Rick Moyers, Against the Grain, Philantrhopy.com