How Much Do Nonprofits Need In An Emergency Fund

I often get asked, how much should a nonprofit have in an emergency fund?  The term “emergency fund” is commonly used in individual finance, but it also translates to a nonprofit. The other phrases that can be used are operating reserves and unrestricted net assets.  Unrestricted net assets is a technical term, but it most accurately refers to the organization's resources that are not restricted for a purpose or by a donor. I use all 3 terms interchangeably. 

 The Minimum Emergency Fund

The most directly answer to the question is at least 2 months.  That number comes from the Nonprofit Industry ratio standard for days cash on hand of 60 days.  I recommend at minimum you have two months worth of an emergency fund/cash on hand.

 When More Than Minimum Emergency Fund

There are times when you should grow the emergency fund to more than 2 months. 

1. You have a donor who makes up a large % of your support.  For example, if you have $120,000 budget and one donor gives 30,000, you have a concentration of risk in that one source.  Consider increasing your emergency fund to the 30,000 especially if the loss of that donor would mean compromising your mission.
2. Grant funding timing impacts cash flow.  Nonprofits that receive grants experience cash flow delays tied to those grant reimbursements.  Increase your operating reserve fund to the amount that reflects the delay you commonly experience.
3. Capital Campaign/Building Projects.  Cashflow can get very unpredictable during these times – due to timing of pledge receipts and the fluctuating nature of construction draws.  Be prepared before a capital project and double your reserves before starting.  If you're normally operating with two months, increase it to four months. 

What If I Have Zero Emergency Funds

It’s true - the best time to plant a tree is 20 years ago. And the second best time is today. If you are currently operating on everything that you bring in, set a priority to spend less, and to put that money aside.   If you reduce your budget spending by approximately 7% each month, within 12 months you'll have one month in an emergency fund. Add to it each year until you get to your goal. 

Being financial prepared, ensures that you can continue your mission even when hard times come!