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One of the biggest challenges for nonprofit organization is the constant attention that must be paid to cash flow.  The contributions, especially grant awards, arrive as a large amount of cash that must be used sparingly over a period of several months until the next grant award is received.  So the answer is, of course, not to let the cash reserve drop below a level of “operating reserve.”  But just how much should be in the reserve? 

The National Center for Charitable Stastitics created a workgroup a couple of years ago to look at the question and answer the question:  “What is an adequate operating reserve?”  After much research, the answer came back:  “It depends.”  Turns out, there is no one-size-fits-all answer to the question.  Despite the many variables and considerations that prevent a precise answer to the question, the Workgroup made the following recommendations:

  1. The minimum operating reserve ratio at the lowest point during the year is 25% or three months of the annual expense budget.
  2. If the circumstances of your nonprofit organization lead you to use a different threshold, use the simplest and most widely applicable formula possible.

Nonprofit does not mean “no surplus allowed.”  Your surplus at the end of the year simply remains in your organization (as opposed to being paid to individuals or shareholders in a for-profit business).  You can and should have an operating reserve to ward off cash flow stress.  More importantly, by having an operating reserve, you ensure the energy of the organization can be placed in good long-term decision-making rather than being forced to make expensive short-term crisis-based decisions. 

If you do not have an operating reserve, start your savings plan today.  Add to the reserve every month in whatever amount you can. 

– Annette