Hi,
Most nonprofit boards can’t answer one simple question: if the money stopped tomorrow, how many months could you keep operating? That number is your operating reserve, and it is the best predictor of whether a rough patch is a bump or a crisis.
Trouble rarely arrives as a disaster. It shows up as timing. If any of these could happen to you, a reserve is what stands between it and a panic decision:
- A grant that reimburses 60 days after you’ve already spent the money
- A major donor who doesn’t renew
- A payroll run that comes due before a pledged gift clears
- An insurance premium or annual audit bill that all lands at once
Here’s how much you should be holding: A minimum of 25% of your annual budget, or about three months of expenses, with many organizations working toward six once they hit three. There is no universal right number – a group with steady, diversified funding needs less than one that lives grant to grant – but “we never set a target” is not a safe place to be, and a lot of nonprofits are sitting on less than three months without realizing it. The catch is that money in the bank is not money you can use, and that is where organizations get burned:
- Unrestricted – yours to spend on operations
- Board-designated reserve – unrestricted money set aside for emergencies, releasable by the board
- Donor-restricted – given for one purpose, and illegal to spend on anything else
Cover payroll out of restricted grant money because “it’s all one account” and you have defaulted on a donor’s terms without meaning to. A reserve exists so you never have to reach for money that isn’t yours.
Reply to this email by Friday and we’ll set up a free 15-minute call with one of our senior nonprofit specialists to pin down your target and review your situation. Bring your last financial statement, and we’ll tell you on the call where your reserve actually stands.
Sincerely,
—
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com