Lenora Williams: Posted on Thursday, June 02, 2011 11:53 PM

Cash is King - Why nonprofits should have reserves

What are reserves?

They are funds available for use by the organization at the discretion of the board of directors (i.e. unrestricted dollars, cash). These funds are usually invested in a very conservative manner i.e. money market accounts, government bonds, etc. The investments usually have low interest rates in exchange for the ability to liquidate the investments at any time.

Why do nonprofits need reserves?

In the nonprofit world there is always the balancing act of managing the operating income and the expenses. Our current economy pushes the envelope by creating more and more funding uncertainty. Whether funding cuts are expected or unexpected reserves provide a necessary cushion for survival.

Reserves also allow organizations to build strong credit ratings. Similar to our personal credit scores, nonprofits build favorable financing scores for growth and expansion based on their financial statements which reflect their cash on hand, their reserves .

How do you build reserves?

Through unrestricted funds, which are usually generated by; general donations with no strings attached, foundation funds that are for the general purpose of supporting the organization and fund raising events. You can not build reserves by using restricted grant funds like government funds; federal, state, county and city. If you have unspent restricted grant funds they must be returned to the funder or a request must be made to expand the grant time line.