The life of a non -profit society can be full of drama. The ever-changing requirements of funders, not to mention the sometimes-unpredictable world of donations, can make financial management a very difficult task.
In this environment, cash needs to be monitored carefully. Even more importantly, cash needs to be maintained to cover temporary cash shortfalls (ie: delay in receipt of the holdback portion of a grant), revisions in management estimates, unforeseen events (ie: wildfire or other interruptions to operations), or to save for a planned upcoming purchase. The Operating Reserve is a way to maintain that cash.
Many non-profits avoid operating reserves because they are concerned the reserve will disqualify them from certain grant opportunities. Here are four ways your organization can mitigate that risk:
- Consult with Stakeholders (Members and Funders) and Perform a Risk Assessment
What future risks could a reserve help to buffer? Which grant applications might the reserve impact? Is it worth forgoing a particular grant in favor of sustainable operations?
- Internally Restrict the Operating Reserve
Create a policy that outlines the purpose of the funds in the reserve, when that expected fund purpose will be met (ongoing or a fulfilled by a planned event), who has the authority to approve related spending, and responsibilities around budgeting, reporting, and investment.
- Track Outcomes
Support all spending from the reserve with the required approvals and purchase receipts. In other words, prove that you are using the funds for the purpose intended.
- Communicate to Stakeholders
The users of the financial statements should be provided with information about the reserve and how it benefits the sustainability of the organization in the pursuit of its mandate. Be proactive!
Cedar Creek CPA 