Spring 2011 issue of Horizons

In a 2010 publication, organizations are encouraged to include a plan for developing operating reserves as they emerge from this economic crisis. This publication, the Operating Reserve Policy Toolkit for Nonprofit Organizations , was released in September 2010. The toolkit explains what operating reserves are and why they are important, defines three types of operating reserves, recommends the development of a written operating reserve policy, and provides guidance on the appropriate level of reserves and methods of managing the operating reserve. The toolkit contains a variety of tools, such as sample policies, that not-for-profits are encouraged to use. Operating reserves, as defined within the toolkit, are a component of unrestricted net assets. First, available unrestricted net assets are calculated by taking unrestricted net assets less equity in fixed assets (fixed assets, net of related long-term debt). Second, these available unrestricted net assets are further divided into three categories as shown in the chart below: 1. Board designated (non-operating) funds such as quasi- or board-designated endowments

2. Undesignated operating funds including non-liquid assets such as long-term receivables, inventory, prepaid expenses, net of related liabilities 3. Board-designated operating reserves The workgroup suggests that the board-designated operating reserves should be, at a minimum, 25 percent or 3 months of the annual expense budget. However, because of the diversity of organizations, they indicate that there is “simply no single correct solution for all organizations” and that a variety of factors should be considered in establishing a reserve policy. Reserve Policies The two main factors cited in developing a policy specific to an individual not-for-profit organization are revenue streams and spending levels. Factors that may impact revenue volatility risk include: • Stability of donated revenue from primary sources • Predictability of pledge collections • Reliability of government funds

Unrestricted Net Assets

Available Unrestricted Net Assets (Available for designation by board)

Not Available (Equity in fixed assets is not available for designation by board)

Undesignated Operating Funds

Board Designated (Non-Operating) Special Purpose Funds/Quasi-endowment (If applicable)

Board Designated Operating Reserves (Board establishes minimum Operating Reserve Ratio - % of annual operating expenses)

(Undesignated portion of available net assets) (Can include non-current, non-liquid net assets excluded from a “funded” reserve)

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