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Think about your reserve funds now

It’s OK for nonprofits to draw upon their reserves. It’s not uncommon but it’s also important for organizations to think about implementing a reserves policy long before they tap their rainy day fund.

During a session titled, “Determining the Appropriate Level of Reserves for Your Organization,” at the AICPA’s annual Not-for-Profit Industry Conference earlier this year in Washington, D.C., Mark Oster of Grant Thornton LLP provided organizations with a few things to consider when implementing a reserves policy:

  • Documenting your reserves policy: Every policy should have a clearly articulated purpose for reserves; a process for monitoring and reviewing annual reserve requirements; responsibilities for establishing and maintaining reserve levels and processes to respond to risk events, such as escalation, notification and approval.
  • Communicate, culture and process: Publicize to internal and external constituencies: the plan can help development functions and board members more clearly articulate why their institutions are “not rich” and why these funds have been set aside.
  • Address the culture: it’s OK to spend this money, just because a risk occurred doesn’t mean offerings must be pruned or altered.
  • Update the plan — and risk analysis — annually.
  • When to draw upon reserves: Methodology recommends organizations draw upon reserves to address deviations from budget. Drawing upon reserves should be expected.

Every organization should adopt a unique reserves plan to meet its specific needs and circumstances, according to Oster, who is national managing partner, Not-for-Profit and Higher Education Practices at Grant Thornton. Maintaining balance sheet health via reserves enables nonprofits to be prepared for the future while providing stability in operations.

As we celebrate our 36th year, NPT remains dedicated to supplying breaking news, in-depth reporting, and special issue coverage to help nonprofit executives run their organizations more effectively.