Karen Houghton
May 10, 2022
Ultimate Guides for Nonprofits

Nonprofits are oftentimes so focused on making a positive impact on their community that they’ll forget about the money side of running their organization. 

Yet the money side of things is also 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 reserve fund-related questions—from the different types of funds to why you should have one to how much it should hold. 

But what exactly are reserve funds? Let’s begin by defining reserve funds in a nonprofit context. 

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. 

Generally, 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.

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 how your reserve funds will be funded and maintained. 

Types of Nonprofit Reserve Funds

When building your nonprofit’s reserve fund, there are two main types to consider: operating reserves and capital reserves.

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. 

There are two major types of nonprofit reserve funds: operating reserves and capital reserves.

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 nine 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.

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 twelve months of your operating budget in your nonprofit’s checking account.
  • Place thirty to sixty days of your operating reserves in a money market for emergency savings.
  • Invest nine to twelve months of your operational reserves in a conservative and diversified portfolio of stocks and bonds.
  • Invest capital reserves that you don’t plan on spending in the next twelve to eighteen months in a conservative and diversified portfolio of stocks and bonds.
  • Use any additional funds to start new ventures, create a growth portfolio, or seed an 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 placing your nonprofit reserve funds in a conservative, diversified, and rebalanced portfolio of ETFs and index funds that can bring average annual returns from 5 to 8 percent.

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 savings account, money market, or CD. Why is this a mistake?

Because reserves are usually held for long periods of time, inflation can dramatically impact the buying power of your savings—especially if they’re invested too conservatively 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. Investing nonprofit reserve funds works in much the same way. 

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 the market in order to retain buying power over the long-term. When deciding how and where you’ll invest your reserve funds, consider asking the following questions of each provider:

  • What are the associated service and investment fees? 
  • How will you access your funds? Do you need to go through a broker to invest and withdraw your funds?
  • What types of security features does the provider offer?
  • What investment portfolio options are available?
  • 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 savings, money markets, or CDs. 

Our asset management platform allows you to manage your reserves all in one place, easily create endowments, and receive noncash gifts. 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 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:

  1. Inception. Begin a conversation with key stakeholders, including board members, about the need for a reserve fund policy.
  2. Recognition of Need. Stakeholders (hopefully) will acknowledge the need for a reserve funds policy and offer their initial thoughts.
  3. Development. Once you’ve secured buy-in, work with your team or a related committee to conduct initial research. 
  4. Draft Policy. Write a draft of your nonprofit reserve fund policy as part of your nonprofit’s larger investment policy statement. 
  5. Board Feedback. Present the policy to key stakeholders for their feedback. Stakeholders may request revisions and edits. 
  6. Final Draft. Incorporate feedback, finalize the policy statement, and submit to board for approval.
  7. 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.

Further Reading

Ready to grow your nonprofit reserve funds further? Take a look at our additional Free Tools and Resources for Nonprofits as well as the following guides:

To be a sustainable and impactful organization, you need to build your reserves, hedge against inflation, and grow your giving. The financial experts at Infinite Giving can help.