09/26/2023

The Importance of Establishing Operating Reserves for Nonprofits

A minority of nonprofits have more than six months of cash in reserve

One of the most impactful grant programs the Kendeda Fund has ever undertaken was funding our nonprofit partners' operating reserves. At the end of 2023, Kendeda will be "sunsetting"—winding down three decades and nearly $1.2 billion in grantmaking—and this relatively modest ($7.6 million) and decidedly "unsexy" grant initiative began as a way to prepare our grantee partners for life "after Kendeda." But it has had such an outsize impact on partner organizations and the people they serve that we feel compelled to share what we learned in the hope that other philanthropies might consider similar programs.

According to the Nonprofit Operating Reserves Initiative (NORI), "Operating reserves" are the portion of "available unrestricted net assets" that an organization's board maintains and/or has formally designated (or reserved) for use in emergencies, to sustain financial operations in the event of significant unbudgeted increases in operating expenses and/or losses in operating revenues. The minimum operating reserve ratio, at the lowest point during the year, suggested by the NORI is 25 percent, or three months of the organization's annual expense budget.

A minority of nonprofits have more than six months of cash in reserve, according to reports like the Nonprofit Finance Fund's State of the Sector; many have less than three months of operating reserves on hand. While living that close to financial insolvency may be common, it is extremely risky for any nonprofit, not just those whose funders are sunsetting. This lack of financial security can have a complicating ripple effect throughout an organization, making it hard for leadership to make decisions, address crises and forecast future opportunities.

Please select this link to read the complete article from SSIR.