According to a recent economic forecast, the likelihood that a recession will occur in the next 12 months has been steadily declining. However, a potential recession is not the only economic crisis that nonprofits need to be leery of in the current climate.
A recent trend of major federal budget cuts may make access to funding scarce for thousands of nonprofits across the United States.
Without a financial cushion, your organization may face service disruptions and staff reductions. The organization itself may even face the threat of closure. The good news is that you can weather the financial uncertainty of 2025 by building up your operating reserves.
Here are some practical strategies that you can implement now to promote organizational resilience.
Create a Written Reserves Policy
Step one involves establishing a formal reserves policy. This policy should clearly outline the following:
- Target Reserve Amount: While there is no one-size-fits-all amount, many nonprofits aim for reserves that will cover three to six months of operating expenses
- Risk Assessment: Assess your risk and determine whether you need a larger reserve to account for an unexpected loss of your funding sources
- Usage Guidelines: Define when and how the reserves can be accessed
A well-written reserves policy lays the groundwork for creating and maintaining adequate operational reserve funding.
Tips to Build and Maintain Reserves
Once you’ve created a solid policy, you should:
Allocate Windfalls and Surpluses
If your nonprofit receives surplus donations or other funding, consider directing part of that money into your reserves. These windfalls provide an opportunity to strengthen your financial position without affecting day-to-day operations.
Include Reserve Funding in Your Budget
Examine your budget and look for opportunities to trim the fat. You can’t rely solely on surpluses to fund your operating reserve account. Cut out any excesses that you discover and allocate a percentage of annual revenue specifically for reserves. This is a good long-term strategy for building and maintaining your operating reserves.
Share and Pool Resources
You need to free up capital to build your operating reserves. One way of reducing your operational costs is to share resources.
Other nonprofits in your community pay for the same resources you do. For example, they have to lease space, buy or rent equipment, and pay utility bills. You can team up with like-minded nonprofits to pool your resources and decrease your operational costs. Use that extra cash to invest in your operating reserve fund.
Conduct an Audit
If you aren’t sure where to pull funding from for your operating reserves, it may be time to conduct an audit. A comprehensive audit can reveal issues in your accounting processes that may create compliance challenges. Auditors can also identify sources of waste and help you refine your budget to free up funding for your operating reserves.
Get Donors and Leaders on Board
Talk to the leadership team and your top donors about your plan to build up your operating reserves. You need them on board. Discuss the importance of financial stability and lay out your plans for contributions and usage. Winning them over early on will help you build up your operating reserve fund faster.
Schedule a Consultation With Ernst Wintter & Associates LLP
Want to make sure your nonprofit organization is prepared for whatever challenges it faces in 2025? EWA can help examine your financial health with our comprehensive auditing and advising services. Contact our team to schedule a consultation.
