A cash reserve, sometimes called an “operating reserve,” is just that: cash. It is a portion of net assets that is unrestricted and relatively liquid. Funds that should not be considered part of an operating reserve include endowments, temporarily restricted funds and non-liquid fixed assets, such as your buildings and equipment. Cash reserves are typically built using unrestricted contributions, investment income and/or intentionally budgeting to create a surplus.Cash Reserve

An organization’s board of directors usually determines the amount and purpose for cash reserves. For example, it may establish an operating reserve to continue program services after a longtime corporate donor drops off. Other reserves may be established for future construction, to develop an endowment fund, or simply to have in case of an emergency.

Determining how much should be in your operating reserve depends on your organization and its operations. An organization should generally aim for its cash reserves to cover three to six months of operating expenses. However, nonprofit organizations are advised to avoid accumulating more than a year’s worth of expenses in reserves. Such a large nest egg may be viewed skeptically by potential donors. By storing so much cash, donors may discern the organization is not using its funds to their full potential. On the other hand, donors can feel confident giving to an organization who has cash reserves set aside, so that the organization’s mission can still be carried out even during lower volume periods of giving.

Many organizations have been able to continue operating during the coronavirus pandemic due to the reserves they set aside previously. When the pandemic is over, many organizations will have to replenish their cash reserves, but will know the planning and budgeting done previously helped their organization survive and continue carrying out its mission. An event such as this really conveys the importance to your organization of cash reserves. If your organization does not have any reserves in place, start reviewing your budget now and determine how you can set your safety net up today!

Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.

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Lindsay Lang - Greensboro CPA Firm

Lindsay Lang, CPA
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