Checklist for Creating Your Nonprofit Operating Reserve Fund

Your community counts on you. Whether it’s for support when they are going through a rough patch or because you provide a service that brightens their world, your nonprofit organization serves an important purpose. But the need for your services isn’t always easy to forecast. Evolving circumstances, such as economic or regulatory changes, can impact the availability of funds and income-producing programs.

By establishing an operating reserve fund, you can provide a financial safety net for your nonprofit so you can be there for your community long-term. These seven steps will help you understand what you need from your operating reserve fund, when to get buy-in from your stakeholders, and how to document the process.

1. Understand what it means for your nonprofit to be financially stable

There is no one-size-fits-all calculation for nonprofit financial stability. Spend time evaluating the consistency and diversity of your cash flow and the amount of control you have over your spending. Understand what circumstances could affect the demand for your services or the ability to bring in funds—changes in government regulations or community preferences, for example— and the likelihood of that happening. All these factors will impact the amount of your operating reserve fund and the process for maintaining it.

2. Make the case for an operating reserve fund to your Board.

Communicate in numbers and narrative. Share data around fluctuations in demand, either that you’ve seen directly or from industry sources. Highlight the benefits of having a financial cushion, from the flexibility it gives you to take advantage of opportunities when times are good to alleviating the stress of meeting unexpected demand when times are tight. An operating reserve provides the ability to think and act strategically because you are not living hand-to-mouth as an organization.

3. Identify the appropriate amount for your operating reserve fund.

With a handle on what it means for your organization to be financially stable and buy-in from your stakeholders, it’s time to identify an amount to set aside for your operating reserve fund. The Nonprofit Operating Reserves Initiative (NORI) Workgroup suggests that your operating reserve should be at least three months of the annual operating expense budget, but typically it is more than that based on longer-term commitments and goals specific to your organization.

4. Draft an operating reserve policy.

Your operating reserve policy will clearly outline its purpose, what the fund can be used for, and how it will be replenished when it is used. Review policies from peer organizations to see how other nonprofits of your size and in your impact area have documented their operating reserve. Be sure to include the history behind creating the fund and definitions of key terms so anyone who accesses the policy later can understand the context, even if they weren’t part of the inception.

5. Get approval from your Board.

Build in time to get feedback from your Board on the policy and the appropriate amount for your operating reserve fund. While Board members approved establishing the operating reserve fund, they may have questions about how it will be used and managed. When you get feedback, make sure everyone agrees on whether the Board needs to review the final or if the policy is complete once the feedback is incorporated.

6. Fund your operating reserve.

There are several strategies your organization can use to budget and raise funds for your nonprofit’s operating reserve. The most successful method budgets for operating surpluses annually. You can also include it as part of a capital campaign or identify nonrestricted donations (such as Board member contributions) for this purpose until the operating reserve is funded.

7. Include your policy with your internal controls and review it regularly.

Like all your internal controls, your operating reserves policy should be well-documented, easily accessible, and reviewed on a regular basis. Having this policy available to stakeholders can proactively answer questions about the operating reserve fund and build trust.