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Oct 10, 2012

Finally, some real help in thinking about what reserves a healthy nonprofit should have

I continue to advise nonprofits that struggle with the notion of earning a profit.  They seem to think that any accumulated profits are wasted resources.  As I was pondering additional arguments to use to persuade them, I was reminded of an ad-hoc working group that tackled the need for and definition of operating reserves.  They published a very useful, practical, and implementable white paper in 2008 titled MAINTAINING NONPROFIT OPERATING RESERVES An Organizational Imperative for Nonprofit Financial Stability. This group has since collaborated with the National Center for Charitable Statistics (NCCS) of the Urban Institute, which maintains a website on the topic.

Many nonprofits don’t know where to start.  To help them, the NCCS provides a toolkit that is really a workbook; it guides one through the concepts and in an extensive set of appendices provides examples of policies a board should consider for adoption, reports the board should regularly review, disclosures that should be included in the notes to the audited financial statements, and so on.

This is a terrific resource that every nonprofit CEO, CFO, and board chair and finance committee member should have.  It echoes my long-standing concern with the health of nonprofits and the need for more focus on liquidity and their balance sheets.  I devoted all of chapter 3 of More Than Just Money to the need for and uses of reserves.  In Linking Mission to Money I laid out the six reserve funds I thought every nonprofit should consider establishing.

I call  reserves “tools for sustainability” because that is exactly what they are.