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.