How can we move toward having a cash reserve fund?

Cash reserves (in this case, meaning cash on hand or more formally, “operating reserves”) are critical for any organization. Most experts recommend maintaining enough cash on hand to cover three to six months of operating expenses. However, this is a generalization and may not apply to all organizations.

It’s important to consider your own unique circumstances. For example, an organization that relies largely on fees for service or has long-term contracts in place may not need six months of reserves. For a newly launched organization, six months is likely unrealistic, but could be an important goal. Whatever your nonprofit’s situation, it’s widely agreed that all organizations should have an absolute bare-minimum of one month’s reserves.

Moving toward the development of a cash reserve fund is not unlike building up your own personal savings account. You need to look at where revenue is coming in, where it’s allocated (for example, monies earmarked for rent or restricted donations won’t be helpful here), and where it can be drawn upon to bolster cash reserves. Sometimes, you need to tighten your belt.

There are a few primary places from where a nonprofit can draw off funds to strengthen the cash reserve: fees for service, individual donations, general operating grants and fundraising events. As you develop your budget, consider how much funding is coming from these or other relevant sources and begin to siphon off a percentage for your cash reserves. Establishing a benchmark, say 10 percent, can be helpful in prioritizing other areas of your budget in ways that can help meet that goal.

You won’t get to six months’ reserves overnight, but progress can be made relatively quickly.

Finance FAQ

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