Keeping cash in reserve for a “rainy day” seems like a luxury, but when economic headwinds blow they can ensure your charity or nonprofit continues its social or environmental purpose

Nonprofits who have not set aside enough funds (or any funds) in their operating reserves are facing a battle for survival in the current economic environment. Donors are giving less and government funding cuts are starting to bite hard.

It’s important to understand that an operating reserve is an unrestricted fund set aside for a “rainy day” – that is a temporary unexpected cash flow issue such as delayed payments, an IT project cost blowout or loss of an expected grant. It is not there to cover a structural deficit where the organisation should plan to replace the income or reduce costs.

A commonly used cash reserve goal is 3-6 months’ expenses, but the amount should really reflect an appropriate level of risk. Charities with multiple and diverse reliable income sources don’t need as much set aside as organisations reliant on a handful of restricted and periodic grants.

Similarly, a charity should consider increasing its cash reserves if the likelihood of an economic recession increases. The organisation’s appetite for risk and other factors such as potential regulatory changes (i.e. DGR reform) may also influence the assessment.

Donors and stakeholders will have greater confidence in a charity that demonstrates good financial management. You can easily check a charity’s net cash, current ratio and assets on the ACNC website or by using our benchmarking tool here.

Cash reserves are different to a charity’s overall strategic reserves. A charity may retain and invest surpluses to build a strong balance sheet for future use: such as the implementation of a new strategy or business initiative. It is also important to communicate transparently with donors and stakeholders to explain why reserves are being built up to avoid reputational risk (hoarding money needed for social change).

The board should approve a policy setting out the amount of reserves, its purpose, who is authorised to use them, how this is reported, and how the funds are replenished.

If you need help assessing the risk factors and setting a reserve policy, or if the cash is running out and you need to reduce costs, while optimising program impact (or both) please reach out for a confidential free discussion.