For seven consecutive years Nonprofit Finance Fund’s State of the Sector [1] report revealed that less than 25% percent of those nonprofits responding had more than 6 months of cash in reserve. In fact the majority of the nonprofits responding reported that they had less than three months of operating reserves on hand. And close to 10% had less than thirty days of cash on hand. This may be the reality for many nonprofits, but that does not mean that it is optimal.

Many nonprofit boards adopt policies to maintain an operating reserve because of the conventional wisdom that it is prudent to have some cash set aside “for a rainy day.” More realistically, rather than a rainy day, it may be that the nonprofit’s roof unexpectedly needs replacing, or a long-term funding stream unexpectedly dries up, or anticipated program revenue is not as high as projected. When the unexpected financial shortfall occurs, having cash reserves to tap can help a nonprofit sustain itself in spite of very tough times.

• Understanding reserves [2] (Video: Propel Nonprofits)
• Clear the Fuzzy Thinking about Reserves [3] (Propel Nonprofits)
• How I Learned to Love Cash Reserves [4] (Propel Nonprofits)

It is absolutely true that every nonprofit needs to have adequate cash balances available to support the timing of payroll and other expenses, as well as to pay for unanticipated costs or increases. It’s a myth, however, that a single standard applies for all nonprofits.

– Kate Barr, Executive Director, Nonprofits Assistance Fund

How much cash does your nonprofit need in reserve?

Propel Nonprofits cautions that each nonprofit needs to determine the appropriate level of cash reserves for its own operations. No sample policy will be an exact fit for your organization. Information about how nonprofits invest their reserves is collected in a national survey by the Study on Nonprofit Investing. [5] (SONI).

• Nonprofit Operating Reserves and Policy Examples [6] (Propel Nonprofits)
• Reserves Planning - A step-by-step approach for nonprofit organizations [7] (GrantThornton)

Developing a Cash Reserves Policy

As the governing body with fiduciary oversight to ensure the financial sustainability of the nonprofit, the board of directors may adopt a “reserve policy.” When developing an appropriate policy for your nonprofit, consider including guidance on (i) how much money the nonprofit will set aside at all times, (ii) defining the types of circumstances that will result in assets in reserve being used, (iii) the process the nonprofit will go through to make the determination whether or not to dip into reserves, (iv) the process and timeframe for repayment into the reserve account, and (v) whether there should be any directions, restrictions, or limitations on what the money held in reserve may be used for.

•  7-step policy guide for operating reserves (NPEngage) [8]
• If the board is ready for a deeper dive, a monograph produced by the Urban Institute in collaboration with the United Way Worldwide, [9]Operating Reserve Policy Toolkit, [10] is a bit dated but will help board members understand the concept of an "operating reserve ratio."