We are almost through the first quarter of 2016. Since the start of the year, we have been working diligently to reach the goals that we made at the start of the year. I recently had a discussion with a nonprofit regarding which goals were realistic to set for a “reserve” for their organization, should it be three months, six months or even a year?
That question to me is very dependent on each organization and can’t be a blanket best practice. Each organization needs to ask, “Why do I need the reserve fund?” Many times the answer given is pretty vague, “In case something happens,” or “To give me some elbow room.” These vague answers can be an obstacle to starting the reserve. In a recent post from the Nonprofit Assistance Fund, they noted that there are three primary purposes for a reserve fund for nonprofits.
- Replacement of fixed assets (Fixed Asset Reserve) – Face it, there are many grant opportunities available for fixed asset purchase or repair. The development of a systems replacement plan will give an organization direction for the amount of reserves to establish to replace the long-term assets.
- Unexpected external problems (Operating Reserve) – This could be called the “rainy day” fund. This type of reserve is necessary should the organization have a sudden loss of reliable funding, delays in the receipt of grant funding or a sudden decrease in earned income for the organization.
- Long term planning (Opportunity Reserve) – Every organization should have a long-term strategic vision. Based on what new strategies are planned, likely new or additional funding will be needed. Reviewing the strategic plan can help you determine a goal for reserves to meet those strategies.
We work with our accounting services clients to help them clear that fuzzy thinking and ask specifically what “buckets” does your organization need, why do you need them, and how will they help the organization achieve their mission? If you are interested in developing a policy around your organization’s reserves, let us know and we can share some sample policies and ideas.