Running a nonprofit or any business without money in reserve can be a very risky endeavor. Every organization, including nonprofits, should employ some financial management practices to ensure financial flexibility and stability. However, knowing how much money a nonprofit should have reserved is vital to its successful, stress-free operation.
For nonprofits, it’s no longer a question of having money in reserve but how much money should be reserved for a rainy day. When nonprofits have reserve funds, they avoid the risk of cash shortfalls in their operating expenses. Plus, operating reserves help nonprofits cater to unexpected events effectively.
The number one reason why nonprofits need cash reserves is often to make payroll when reimbursement or donations are delayed. It is illegal to miss or delay payroll and if you have ever had to tell your staff that you are going to miss payroll you learn quickly how many of your employees live paycheck to paycheck.
Although nonprofits rely mostly on fundraising to generate funding to finance their missions, sometimes, they also face some restrictions trying to pull off fundraising events. Nonprofit reserve funds can come in handy while waiting for donations and sponsorship to come without getting into the danger of incurring the higher interest rate associated with credit cards.
There is a big question of how nonprofits should be able to raise reserve funds since they are not-for-profit organizations. Nonetheless, the availability of nonprofit lines of credit has made it pretty easy for nonprofits to have reserves on hand that can be tapped into at any time. The nonprofit line of credit, which is similar to the business line of credit, is specifically designed for nonprofits organizations to help make funds readily available for the successful operations of nonprofits. In addition, like the business line of credit, the nonprofit line of credit is also a revolving credit with a preset rate and a credit limit.
Summary
The Importance of Money Reserved For Your Nonprofit
There’s no denying that nonprofits need reserved funds to operate effectively, especially in recent times when nonprofits’ functions are increasingly becoming more complex. A nonprofit line of credit is a veritable means of ensuring that nonprofits optimize their cash flow in running their day-to-day operations.
Furthermore, having operating reserves shows that nonprofits have a well-thought-out sustainability plan, which will help attract donors and sponsors alike. Experience has shown the importance of maintaining cash reserves in the running of nonprofit organizations. For instance, the Covid 19 pandemic has made many nonprofits with no reserve plan cash-strapped due to unsustainable cash flow. On the contrary, those with a ready-to-go line of credit or cash reserves could successfully navigate the trying time.
What Can Reserved Money Be Used For?
A nonprofit’s reserve funds can be appropriated to do many things within a nonprofits organization. One of the major reasons for having cash reserves is to prepare for an emergency or offset financial uncertainties. Moreso, there are numerous benefits to having reserved money, including using it as working capital when there’s a cash shortfall. Cash reserves can be tapped to organize fundraising events. In addition, nonprofit operating reserves can serve as a buffer in a period of financial difficulty. It can also cater to employees’ welfare in the interim to minimize turnover, pending the time a nonprofit has a healthy financial outlook.
In a nutshell, reserved money enables nonprofits to continue their financial operations even when faced with unexpected challenges like a global pandemic or economic meltdown that significantly reduces nonprofits working capital.
How Much Should a Nonprofit Organization Have Reserved?
Every nonprofit needs to know how much it should have in reserve. However, some variables are worth considering while planning on the requisites funds to reserve.
The amount of money a nonprofit organization should have in reserve depends on its mission, the nature of its projects, the number of the workforce it has, and more. Due diligence ensures that nonprofits have enough cash reserves for any worst-case scenario. In other words, adequate knowledge of the nonprofit’s current financial state and donation history is essential in making a sound decision. In addition, authentic data obtained from the organization’s budget and financial forecast would also help determine the appropriate reserve funds.
However, a general rule of thumb for knowing the right reserve amount is to benchmark it on 3-6 months of your nonprofit’s annual operating expenses budget. It’s worthy of note that the reserve should not surpass the amount of the two years budget. Plus, it should be enough to cover at least one full payroll.
Still, every nonprofit should set its operating reserves based on its cash flow and recurring expenditure.
Conclusion
The importance of cash reserves for nonprofits cannot be overemphasized. Nonprofits board members should map out a strategic cash reserve plan that ensures long-term and sustainable nonprofits operation. Operating reserves make certain the continual cash flow in the management of nonprofits organization.
In the past, nonprofits faced difficulty accessing loans to finance their many pressing projects due to the absence of a nonprofit line of credit. But today, nonprofit line credit has made it pretty possible for nonprofit organizations to access funds at any time as long as they do not exceed the maximum amount set in the agreement. In other words, a nonprofit line of credit can serve as a veritable reserve on hand for nonprofits.
