Nonprofit’s operating reserves are more critical than ever in today’s shifting economic landscape. While recent forecasts suggest the likelihood of a recession in the next 12 months is declining, nonprofits still face serious financial challenges. One growing concern is the trend of major federal budget cuts, which could limit access to funding for thousands of organizations nationwide.
Without a solid financial cushion, your nonprofit may be vulnerable to service disruptions, staff reductions, or even the risk of closure. The good news is that you can prepare for the financial uncertainty of 2025 by strengthening your operating reserves now.
Below are practical strategies you can implement to boost resilience and protect your mission during unpredictable times.
Create a Written Reserves Policy
Step one involves establishing a formal reserves policy. This policy should clearly outline the following:
- Target Reserve Amount: While there is no one-size-fits-all amount, many nonprofits aim for reserves that will cover three to six months of operating expenses
- Risk Assessment: Assess your risk and determine whether you need a larger reserve to account for an unexpected loss of your funding sources
- Usage Guidelines: Define when and how the reserves can be accessed
A well-written reserves policy lays the groundwork for creating and maintaining adequate operational reserve funding.
Tips to Build and Maintain Reserves
Once you’ve created a solid policy, you should:
Allocate Windfalls and Surpluses
If your nonprofit receives surplus donations or other funding, consider directing part of that money into your reserves. These windfalls provide an opportunity to strengthen your financial position without affecting day-to-day operations.
Include Reserve Funding in Your Budget
Examine your budget and look for opportunities to trim the fat. You can’t rely solely on surpluses to fund your operating reserve account. Cut out any excesses that you discover and allocate a percentage of annual revenue specifically for reserves. This is a good long-term strategy for building and maintaining your operating reserves.
Share and Pool Resources
You need to free up capital to build your operating reserves. One way of reducing your operational costs is to share resources.
Other nonprofits in your community pay for the same resources you do. For example, they have to lease space, buy or rent equipment, and pay utility bills. You can team up with like-minded nonprofits to pool your resources and decrease your operational costs. Use that extra cash to invest in your operating reserve fund.
Conduct an Audit
If you aren’t sure where to pull funding from for your operating reserves, it may be time to conduct an audit. A comprehensive audit can reveal issues in your accounting processes that may create compliance challenges. Auditors can also identify sources of waste and help you refine your budget to free up funding for your operating reserves.
Get Donors and Leaders on Board
Talk to the leadership team and your top donors about your plan to build up your operating reserves. You need them on board. Discuss the importance of financial stability and lay out your plans for contributions and usage. Winning them over early on will help you build up your operating reserve fund faster.
Schedule a Consultation With Ernst Wintter & Associates LLP
Want to make sure your nonprofit organization is prepared for whatever challenges it faces in 2025? EWA can help examine your financial health with our comprehensive auditing and advising services. Contact our team to schedule a consultation.
Why Choose Us
Guidance You Can Trust on Managing Your Nonprofit’s Operating Reserves
At Ernst Wintter & Associates LLP, we understand that financial resilience is essential to any nonprofit’s ability to carry out its mission. One of the most important components of that resilience is a well-managed nonprofit’s operating reserves. Whether you’re building your reserve strategy from scratch or fine-tuning it for long-term sustainability, our experienced team is here to help.
Based in Walnut Creek, CA, our accounting firm has spent years supporting individuals, businesses, and nonprofit organizations with their tax and accounting needs. We are proud of our reputation for professionalism, integrity, and personalized service. Our clients are our greatest asset, and we work hard to provide them with timely, accurate, and strategic financial guidance that leads to smarter decisions and stronger outcomes.
Our well-balanced team of professionals brings a wealth of experience to every engagement. For nonprofit organizations, we provide expert assistance with audit readiness, fund accounting, compliance, and reserve planning. We understand the unique challenges nonprofits face in maintaining both liquidity and accountability, especially when reserves are underutilized or misunderstood.
We believe that the best financial strategies come from continual learning and adaptability. That’s why our accountants exceed the continuing education standards of our profession—ensuring that our clients benefit from the most current nonprofit best practices and financial guidance.
Our team can help you define appropriate reserve targets, clarify board policies around fund access, and ensure your nonprofit is well-positioned to weather financial uncertainty without compromising its mission. We take the time to understand your specific goals and tailor a reserve strategy that works for your organization’s size, structure, and growth plans.
For more insights on reserve planning, we recommend the National Council of Nonprofits’ guide to operating reserves.
If you’re ready to improve financial sustainability through a well-defined reserve strategy, Speak with an Expert at Ernst Wintter & Associates LLP. We’re here to help your organization stay mission-focused and financially strong.
