An organization’s financial reserves are a discrete subset of its net liquid assets. They are a distinct pool of assets that an organization can access to mitigate the impact of unbudgeted, undesirable financial events and/or pursue opportunities of strategic importance that may arise in the future.
Mark Oster, national managing partner, Not-for-Profit and Higher Education Practices at Grant Thornton, LLP, presented ideas recently during the during the AICPA’s annual Not-for-Profit Industry Conference in a session called “Determining the Appropriate Level of Reserves for Your Organization,”
Factors that determine which assets can be counted toward “reserves” include liquidity, freedom from any corresponding liabilities and “unrestricted” with regard to donor intent. Specific examples of assets that would not be considered reserves would include plant, property and equipment; endowments and board-designated funds, and pension plan assets.
Beware the pitfalls of benchmarking. Two wrongs don’t make a right and more/less doesn’t mean better/worse. Similarities only go so far, such as risks, impact to organization, etc.
When implementing a reserves policy, it’s important to consider several things:
Methodology recommends organizations draw upon reserves to address deviations from budget. Drawing upon reserves should be expected, he said. Maintaining balance sheet health via reserves enables you to be prepared for the future while providing stability in your operations. Every organization should adopt a unique reserves plan to meet its specific needs and circumstances.
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