Nonprofit Operating Reserves Series
Building and maintaining operating reserves is essential to position nonprofit organizations for long-term financial health and sustainability, provide a safety net for short-term disruptions and funding gaps, and enhance public trust and confidence that the organization is well-managed, stable, and dependable.
This series explores the core purposes and strategic functions of operating reserves and walks you through the key elements and provisions needed for an effective operating reserve policy, including developing and communicating operating reserve goals, how operating reserves are calculated, the importance of addressing parameters for future allowable spending of operating reserves, and more.
Part 1 of 4: Operating Reserve Policies are a Perfect Vehicle for Targeting Your Budget’s Bottom-Line
Nonprofit organizations would greatly benefit from adopting a standardized policy for strategically targeting and managing their annual budget bottom-line. You could argue that there is no greater safety net for overall financial health than having a formal policy, or at least a budget working rule or guideline, for this important metric.
Part 2 of 4: Operating Reserves as a Key Indicator of Financial Health
Just as the gauges on a car’s dashboard provide crucial information about its performance and physical condition, operating reserves serve as a vital indicator of a nonprofit organization’s financial health and as a measure of stability. Operating reserves give a clear view of an organization’s capacity to sustain its operations and weather financial uncertainties.
Part 3 of 4: Remembering the Long-Term Purpose of Operating Reserves
No one questions whether it is important for nonprofit organizations to build and maintain adequate operating reserves. This is a best practice that is not only widely accepted, but also an expected goal for senior management and governance to pursue and protect. However, there often is a tendency to focus too much on the short-term reasons for building and maintaining operating reserves causing us to lose sight of the often more important long-term purpose for building operative reserves.
Part 4 of 4: Adding Spending Provisions to an Operating Reserve Policy
Virtually all nonprofit organizations aspire to accumulate operating reserves to help bridge short-term disruptions and funding gaps and to provide working capital for the future. What most people do not think about is how these operating reserves could be used or spent when the need arises. Misunderstandings can be avoided by making sure your organization’s operating reserve policy has provisions for the future allowable use (spending) of operating reserves.
TEMPLATE:
Operating Reserves Status Report Spreadsheet
This operating reserves status report spreadsheet template will help you provide clear and regular status updates to your organization’s Board of Directors and finance committee, with key information such as the calculation of current and historical operating reserves presented both in dollars and the number of months of budget, and more.