Could your nonprofit benefit from having an operating reserve? The unexpected disruptions that came along with COVID-19 are one more reason why it makes sense to prepare for setbacks and emergencies. Here are answers to some common nonprofit accounting questions about starting and maintaining an operating reserve.
What is an operating reserve?
These are unrestricted funds you set aside to help you deal with unexpected events. That may include shortfalls in income, as well as expenses you didn’t plan on, The amount of money can differ widely depending on the organization, but 3 to 6 months of operating expenses is a typical target.
Why would my nonprofit need an operating reserve?
Your reserve provides you with a cushion during challenging times. It can help you to cover your payroll and continue essential services. If your hardships are temporary, you’ll be able to buy time while you come up with a more lasting solution.
How can my nonprofit implement an operating reserve?
You may be able to create an operating reserve on short notice if you find yourself with extra revenue on hand, such as a large bequest or a legal settlement. If not, you can still gradually work towards your financial goals by setting money aside on a regular basis. However you do it, you’ll also need to think about how you’ll replenish your reserve, so you’re not back to square one after the first time you need to access it. It’s also essential that your board works to adopt a policy regarding the purpose and use of your reserve. As always, skilled financial and accounting services can help you make sound decisions so your nonprofit can operate as effectively as possible.
Contact us at Mainstream Nonprofit Solutions for experienced and dedicated consulting services for your accounting and other business support needs. We can help you maximize your resources while you focus on your mission.