Nonprofit Business Cash Reserves - dummies

Nonprofit Business Cash Reserves

Just like for-profit companies, nonprofits need cash reserves, a cushion of cash or other liquid assets on hand. The question is, how much? The answer depends largely on the nature of your nonprofit’s mission.

For example, a relief agency that responds to unforeseen disasters needs a large bank balance ready to draw upon when the unforeseen need occurs. A nonprofit that runs a community food bank, however, probably doesn’t need anywhere near as great a reserve.

You can imagine why cash reserves are a touchy subject: People donate money to further a good cause, not to see their money sitting around in a bank account somewhere. (The exception is endowment funds, which are set up specifically to generate interest income to fund nonprofit programs.)

The Wise Giving Alliance offers the following guideline: “A charity’s unrestricted net assets available for use should not be more than three times the size of the past year’s expenses or three times the size of the current year’s budget, whichever is greater.”

If you do keep a sizeable reserve fund, be sure your donors understand why the reserve is necessary. Also be sure that your organization has a procedure in place to protect the funds for the appropriate programs and against erosion from administrative or operational expenses.