Managing Nonprofit Cash Reserves: The Ultimate Guide

A nonprofit reserve fund is a key financial milestone to building a sustainable organization that can weather financial setbacks and grow long-term.

Karen Houghton

May 10, 2023

Ultimate Guides for Nonprofits

Nonprofits are oftentimes so focused on making a positive impact on their community that they forget about the equally important financial stewardship of running their organization.

We can't just raise money, we also have to manage it. The financial side of things is crucial to your nonprofit’s success—when times are good and even more so when they’re not. In addition to assessing your ability to fund regular programs and anticipated expenses, your nonprofit should also be prepared to weather the financially unexpected.

That’s where reserve funds come into play! In this guide, we’ll answer the most common nonprofit cash reserve related questions— why you need them, how much is enough, and where you should put them.

But what exactly are nonprofit cash reserve funds? Let’s begin by defining nonprofit reserves.

Want to learn more about the best ways to put your nonprofit’s reserve funds to work? Contact us today.

What Is a Nonprofit Reserve Fund?

A nonprofit reserve fund is a nonprofit organization’s version of a savings account. Unlike funds allocated toward daily programs or activities, these are unrestricted funds set aside from normal operating funds and used sparingly. Some organizations call it a rainy day fund.

Generally, cash reserves are meant for emergencies when expected income falls through or when unexpected expenses hit. Developing a healthy reserve fund is a key financial milestone to building a sound, sustainable organization and should be one of the first priorities when gaining maturity and moving past the scarcity mindset.

Can Nonprofits Have Reserve Funds?

Not only are nonprofits allowed to have reserve funds, but for their long-term financial health, they should have reserve funds. Reserve funds are a key financial piece of the puzzle as a nonprofit seeks financial resiliency and builds capacity over time. A nonprofit organization is not considered financially healthy without some type of reserves. Just like you work to save for family emergencies in your personal finances, so should a nonprofit.

Where Do Nonprofit Reserve Funds Come From?

For nonprofits, reserve funds can come from a number of different sources. Nonprofit reserve funds may be set aside from a surplus at the end of a fiscal year, given from a donor, or accrued from a line in your operating budget.

Additionally, nonprofits can actively grow and replenish their existing reserve funds by taking proactive steps, including:

Identifying reserve growth as a component of a capital campaign.
Allocating portions of grants or sales proceeds to the reserve fund.
Investing existing reserve funds.
Delaying new short-term programs to build long-term sustainability first.

In any case, just like you would build a savings account for your personal household, you should make intentional plans for where you fund and maintain your cash reserves - such as out of your checking account, where they are FDIC insured, or with low risk growth.

Types of Nonprofit Reserve Funds

When building your nonprofit’s reserve fund, there are two main types to consider: operating reserves (payroll, keeping the lights on) and capital reserves for those who have physical assets such as buildings that need repairs.

Many small and medium size nonprofits might end up with just one reserve fund that includes both capital and operating reserves. However, we advocate for separate funds for increased tracking, budgeting, and transparency. You’ll distinguish these based on their amounts, timelines, and intended uses.

Operating Reserves

Operating reserves are funds intended to keep a nonprofit’s monthly operations going (think overhead like payroll, program costs, and normal monthly expenses) in case of a giving shortfall or other emergency challenges.

For example, with today's steep rise in inflation, nonprofits with a healthy operating reserve fund are better positioned to adapt to increased prices for labor and goods—without putting themselves at risk.

As a best practice, nonprofits should set aside enough operating reserves to fund six to twelve months of regular operations.

If a nonprofit can save enough money to meet its operating needs for more than twelve months, those additional funds can be used to start new programs or to seed an endowment and create further organizational sustainability.

Capital Reserves

Capital reserve funds, on the other hand, are funds that are saved and set aside for the capital needs of a nonprofit with physical assets, such as vehicles, buildings, and camp properties.

By owning or leasing physical property and assets, you should expect to incur capital expenses such as repairs and replacements of often large and expensive items. Roofs need replacing! Engines need maintenance! Plumbing and painting and flooring, oh my!

Recommended capital reserve amounts will range according to a nonprofit’s physical assets. A nonprofit that doesn’t own much capital likely needs less than one that does. Nevertheless, all nonprofits should assess their needs and be able to plan and prepare for both expected and unexpected replacement costs. This is strategic, financial stewardship that brings stability and decreases stress on the organization and your donors.

How Much Should You Have in Your Nonprofit’s Reserve Fund?

Although life would probably be easier if this were a one-size-fits-all answer, it’s not. As you may have guessed, different nonprofits will need to set different goals based on their financial situation.

That being said, we’ve compiled a list of general recommendations as a starting point for your reserve fund goals. Ideally, a nonprofit in a strong financial situation should:

Keep your operating budget in your nonprofit’s checking account or a high yield savings. That is your operating budget and not considered true reserves.
If you have over the $250,000 FDIC insured limit and are not a part of a bank's sweep program, we recommend diversifying into another bank or holding with a Nonprofit Investment Advisor.
Reserves outside of your annual budget are considered your true cash reserves. These should be kept separate on the balance sheet and clearly marked for planning purposes.
Both operational and capital reserves should be placed in a low risk, highly liquid investment strategy such as money market mutual funds or Treasury Bills.
Additional funds over these goals can be used to start new ventures, create a growth portfolio, or seed a quasi endowment for long-term sustainability.

If all of these steps are feasible for your nonprofit, you’re in an excellent position to grow both your financial portfolio and your community impact. But for many nonprofits—75 percent to be exact—with six months or less of cash reserves, these goals may seem out of reach.

If this is you, don’t give up! We recommend starting by intentionally creating strategies to build your reserves. As your reserves fund builds, make sure you place them with a Nonprofit Investment Advisor who can ensure they are FDIC insured and placed in low risk, highly liquid holdings. When simply moving money from one place to another can generate income, that's working smarter, not harder.

Where Should You Keep Nonprofit Reserve Funds?

These days, it’s not enough to simply have reserve funds. They should also be saved and invested in a range of places to maximize their value and usefulness.

Too often, nonprofits make the mistake of storing their entire reserve fund in a checking or savings account. Why is this a mistake?

First, it's incredibly important to ensure your funds are FDIC insured. Banks do fail, and it's your responsibility to ensure your donations are protected. Most banks offer nonprofits FDIC coverage only up to $250,000 across all types of accounts. Infinite Giving provides FDIC coverage up to $5M on cash, with no minimums. Where you place your cash reserves is important.

Because reserves may be held for long periods of time, inflation can dramatically impact the buying power of your savings—especially if they’re sitting in low yield accounts and experience limited growth.

Consider the individual equivalent: People often save for retirement not in a savings account, but in a 401(k). By taking this approach, they can simultaneously hedge against inflation and make market returns with compound interest, setting them up for long-term success. Managing nonprofit reserve funds is similar in that they need high liquidity and easy access for short term needs, but they also need to have capital preservation for their longer term needs.

Ultimately, banks are not meant for and do not incentivize storing long-term savings. Savings accounts average 0.09% returns each year. In 2022, inflation, on the other hand, grew above 8%.

Let’s do some quick math: $1M in a savings account with a current inflation rate of 8% means your organization could lose $80,000 of buying power in this year alone. In a savings account, that money could lose up to a third of its value in just five years—right in time to buy that new HVAC system.

Thus, as a best practice, most nonprofits should plan to invest their reserve funds in conservative, liquid holdings such as money market mutual funds, Treasury Bills, and CDs in order to retain buying power over the long-term. When deciding how and where you’ll place your cash reserve funds, consider asking the following questions of each provider:

What are the current rates and yields for their conservative offerings?
Will your funds be FDIC insured?
Can they help you create an Investment Policy Statement?
How will you access your funds when needed? Are there penalties?
What types of security features does the provider offer?
How easy is it to work with the provider and use their investment platform and services?

Infinite Giving can help you create multiple reserve accounts that are conservatively invested and often bring higher returns than banks along with FDIC coverage.

Our nonprofit experts partner with nonprofit teams and their boards to help you manage your cash reserves, create endowments, and even receive donations through our Donation platform. Moreover, you have complete access to your funds at any time and can easily transfer from your reserves to your checking account as needed.

Developing a Nonprofit Reserve Funds Policy

Alongside building your nonprofit cash reserve fund, you should also develop an accompanying reserve fund policy as part of your nonprofit’s overall investment policy statement.

Before investing your nonprofit reserve funds, work with your board of directors to craft a policy statement.

‍Without clear policies, reserve funds can easily be spent and depleted over time, putting nonprofits in undue financial risk. Your policies should address strategies, spending policies, cash thresholds, key stakeholders, and asset allocation. Here are the steps nonprofits should take to build their policy:

Inception. Begin a conversation with key stakeholders, including board members, about the need for a reserve fund policy.
Recognition of Need. Stakeholders (hopefully) will acknowledge the need for a reserve funds policy and offer their initial thoughts.
Development. Once you’ve secured buy-in, work with your team or a related committee to conduct initial research.
Draft Policy. Write a draft of your nonprofit reserve fund policy as part of your nonprofit’s larger investment policy statement.
Board Feedback. Present the policy to key stakeholders for their feedback. Stakeholders may request revisions and edits.
Final Draft. Incorporate feedback, finalize the policy statement, and submit to board for approval.
Implementation. Put your policy into practice as you begin building your reserve fund!

As a next step, you can make your own policy statement with our free investment policy statement template. Fill it out with your nonprofit’s information and tweak it to meet your investment needs. Your Nonprofit Investment Advisor can help guide you.