Spring 2011 issue of Horizons

Not-For-Profit – continued

Benefits To Reserves There are a variety of purposes and uses of these reserves. Having reserves has been very beneficial to organizations that have suffered/are suffering from the economic downturn over the last couple of years. Coupled with cutting costs, organizations with reserves have been able to maintain their programs and continue providing services despite reductions in revenue and investment income. Similarly, reserves could be used if an organization loses a major funding source or if collections on receivables are delayed. But, reserves can also be established for more strategic reasons. For example, reserves can be set aside for future capital projects or capacity building. While many not-for-profits have reserves as a result of operating surpluses over the years and realize it is important to have reserves, most have not had internal strategic discussions to the extent recommended in this toolkit or developed a written operating reserve policy. As we emerge from this economic downturn, these best practices on reserves should be discussed and considered.

• Level of dependence on 1-2 key donors • Economic health of community • Publicity • Regulatory changes

Factors that may influence spending levels include: • Extent to which economic downturns may affect demand for services • Extent of long-term funding commitments • Amount of unsecured debt • Long-term leases with substantial penalties for cancellation • Ability to downsize operations quickly and still provide services • Level of dependency of programs on stable, individual funding streams The higher the risk a not-for-profit has for revenue volatility, the more reserves an organization should have. Likewise, the higher the risk for spending volatility, the more reserves an organization should have. If an organization has high risks for both, the organization should consider reserves of 50 percent, or 6 months, of the annual expense budget. These concepts are depicted in this matrix from the toolkit:

Operating Reserve Balance Decision Matrix

HIGH

3-6 months

6 months or more

Less than 3 months

3-6 months

Risk for spending volatility

LOW

HIGH

Risk for revenue volatility

Raise Your Expectations

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