How can we create a reserve fund and manage it effectively? 

How to Find Your Reserve Funds on Financial Statements

     Reserve funds represent the net income after expenses from prior years that are held by the nonprofit and not needed for the current year’s operations. So how do we find our reserve balance? First of all, it’s definitely not the cash in your bank account. Why not? Well, you have cash in your bank account that's obligated for other things like accounts payable or unpaid invoices. Furthermore, you probably have cash in your account that's restricted for a specific purpose beyond operations. So where do we find this number? You'll find it in your Statement of Financial Position, (also known as the balance sheet) under the last section called “Net Assets.” 

Understanding Nonprofit Net Assets

     What do net assets reveal? Well, they tell you exactly how much you are holding in available reserve funds. Keep in mind, your reserve funds are unrestricted net assets. I highly recommend separating your net assets into the following categories: 

•  unrestricted funds
•  restricted funds
•   Board-designated funds
•   Non-Liquid Assets (meaning they’re tied up in fixed or capital assets)

How Much Reserve Should a Nonprofit Have? 

     For the sake of demonstration, let’s use a big round number and say that you’ve identified unrestricted net assets of $1,000,000.  Let's also say your annual budget is $4,000,000. In this case, you’d have one fourth of a year’s budget or three months worth of reserve. However large or small your budget may be, having three months of cash reserve is an ideal place to be. 

How to Manage Your Nonprofit’s Reserve Funds

     So, now that you know where to look for your reserve and you’ve determined how much you actually have, what do you actually do with these funds? If these resources are truly a reserve, meaning that you don't currently need them, then you’ll need a cash management strategy that prioritizes safety. Thank of your reserve like an insurance fund for a rainy day. It's your insurance that if something goes wrong, you've got the resources to continue to fulfill your mission. So this is not an opportunity to invest in the most volatile part of the stock market and play a game of chance to see how much you can earn. Instead, I recommend putting these reserve funds in an insured account where the principle is protected. From there, you’ll want to make sure that it's earning a decent interest rate given the current market situation. Finally, you’ll want to make sure that your reserve funds are liquid. You’ll definitely want the ability to access the funds if the need arises. 

     As I write this in early 2024, the environment is so unique. I have not seen interest rates like this in a really long time! You can actually get an insured account that's protected, liquid and earning a very decent return. For exact rates, you’ll want to talk to your local bank or investment company to see what insured products they can offer, but I'm seeing realistic rates of 4% to 5%, and I've even seen 6%. It's a very unusual time offering a really favorable environment for managing a reserve. 

     To learn more about nonprofit net assets and cash reserve, click here to go to my blog library and search “net assets” or “reserve” in the search bar. While you’re there, subscribe to my weekly emails to get more helpful resources specifically for nonprofit leaders delivered straight to your inbox each week!