15 Oct Building Financial Strength: The Role of Operating Reserves in Nonprofit Resilience
As nonprofits navigate a challenging landscape shaped by economic uncertainty, delayed government reimbursements, shifting donor priorities, and growing service demands, maintaining financial stability requires more than short-term budgeting. True sustainability depends on a forward-looking strategy built on liquidity, flexibility, and preparedness.
At the center of that strategy is the operating reserve — a financial safeguard that allows mission-driven organizations to weather disruptions, plan strategically, and pursue opportunities with confidence. While the concept is not new, many organizations still underestimate its value or misunderstand how to manage it effectively. This article provides a roadmap for understanding, building, and governing operating reserves with clarity and purpose.
Understanding Operating Reserves
An operating reserve is a portion of unrestricted net assets that a nonprofit’s board designates to stabilize operations during periods of financial stress. It differs from working capital or rainy-day funds because it is guided by formal board-approved policies that outline purpose, usage, and replenishment.
Unlike restricted funds or endowments, reserves are flexible and liquid — typically held in cash or short-term investments — and can be used to:
- Offset delays in revenue or reimbursements
- Cover emergency expenses
- Sustain operations during downturns
- Bridge budget gaps or support strategic transitions
Why Operating Reserves Matter Now
Recent disruptions — from the COVID-19 pandemic to inflationary pressures and changing donor behavior — have exposed how vulnerable nonprofit financial models can be. Research from the Urban Institute’s Nonprofit Operating Reserves Initiative (NORI) found that many organizations, particularly smaller ones, operate with less than three months of reserves.
Operating reserves are not just a safety net — they are a strategic asset that supports long-term mission delivery, operational agility, and stakeholder confidence.
Strategic Benefits of Operating Reserves
| Benefit | Description |
| Continuity of Services | Ensures uninterrupted service delivery even when cash flow is strained. |
| Cash Flow Stability | Reduces the need for short-term borrowing or using restricted funds. |
| Time to Pivot | Gives leadership breathing room to respond strategically to challenges. |
| Strategic Investment | Creates opportunity capital for technology, infrastructure, or partnerships. |
| Donor and Funder Confidence | Demonstrates financial stewardship and accountability. |
| Organizational Morale | Reinforces stability and confidence among staff and board during uncertainty. |
Common Concerns and Misconceptions
Despite their benefits, some organizations hesitate to build reserves because of philosophical or practical concerns.
| Concern | Explanation | Response |
| Perception of hoarding | Donors may interpret large reserves as lack of funding need. | Communicate clearly that reserves protect mission continuity and fund future impact. |
| Opportunity cost | Idle funds may appear unproductive. | Use a portion of reserves as “risk capital” or place in short-term, mission-aligned investments. |
| Resistance from leadership | Some prefer to use all available funds immediately. | Educate stakeholders that reserves enable sustainability, not constraint. |
| Policy confusion | Lack of clarity in classification or governance. | Follow FASB ASC 958 guidelines and establish board resolutions and transparent ledger entries. |
A Step-by-Step Framework for Building Reserves
Creating and maintaining a healthy operating reserve requires intentional planning, policy, and integration with financial management practices. The following framework aligns with guidance from the Urban Institute’s Nonprofit Operating Reserves Initiative (NORI).
Step 1: Educate and Align Leadership
- Brief board and senior management on the purpose of reserves.
- Highlight how reserves prevent crises and sustain mission delivery.
- Reference industry data from organizations like the Urban Institute or Charity Navigator to support the case.
Step 2: Assess Financial Position and Risk
- Review unrestricted net assets and liquidity ratios.
- Conduct a risk assessment to identify potential disruptions.
- Calculate current “months of reserves” based on core operating expenses.
Step 3: Define a Reserve Target
- Set a target — often 3–6 months of expenses — based on revenue volatility and cost structure.
- Customize goals to reflect your organization’s size, mission, and risk profile.
Step 4: Develop a Reserve Policy
Include:
- Purpose and objectives
- Target level and calculation method
- Conditions for use and approval process
- Replenishment plan after use (e.g., using annual surpluses)
- Regular reporting and review schedule
Step 5: Designate and Record the Reserve
- Approve through a formal board resolution.
- Record as “Unrestricted Net Assets – Board Designated: Operating Reserve.”
- Keep assets liquid and conservatively invested (cash, money market funds, short-term CDs).
Step 6: Integrate with Financial Management
- Include reserve updates in monthly reports and annual audits.
- Align with budgets and fundraising narratives to emphasize fiscal responsibility.
Step 7: Monitor, Communicate, and Adapt
- Review reserve levels quarterly with the finance committee.
- Replenish within two to three years if used.
- Communicate with funders about how reserves support mission continuity.
Governance and Oversight
For reserves to serve their purpose effectively, nonprofit boards must:
- Understand the distinction between restricted, unrestricted, and board-designated funds.
- Commit to reviewing reserve policies every two to three years.
- Ensure reserve levels align with current risks and strategic priorities.
- Avoid using reserves for convenience rather than genuine need or opportunity.
Key Resources and Best Practices
The Nonprofit Operating Reserves Initiative (NORI), led by the Urban Institute, offers guidance, benchmarks, and templates for establishing and managing reserves, including:
- Maintaining Nonprofit Operating Reserves — a white paper outlining rationale and benchmarks.
- Operating Reserve Policy Toolkit — sample policies and worksheets.
- Data and Benchmarks — analysis showing that many nonprofits maintain dangerously low reserves.
Additional tools are available through the Greater Washington Society of CPAs’ Nonprofit Accounting Basics portal and the Urban Institute’s website.
A Call to Action for Nonprofit Leaders
In today’s environment, financial leadership requires more than compliance — it requires foresight. Properly governed and communicated reserves are not a sign of excess but of strength and responsibility. They enable nonprofits to adapt, protect staff and services, and invest strategically in the future.
Boards, CFOs, and executive teams should treat the creation and maintenance of operating reserves as a strategic priority, not an afterthought. Begin with education, formalize with policy, and sustain through disciplined governance. The next time uncertainty arises, your organization will be ready — not reacting.
At Blackman & Sloop, we partner with nonprofits to strengthen financial resilience and mission continuity. Our team helps organizations design sustainable reserve policies, align governance with best practices, and integrate long-term planning into everyday financial management. Together, we can help your nonprofit prepare for what’s next — with confidence and clarity.