Operating Reserves
Sometimes you have to think about headlines we read. I’m not talking about “fake news” but information that we see about our sector in general. The January 31st Chronicle of Philanthropy recounted the findings by Guidestar, Sea Change and Oliver Wyman about the “Financial Health of U.S. Nonprofit Sector.” Reading it one would wonder how most nonprofits can survive, but indeed there are a lot of good things happening with many great charities that don’t have operating reserves. So don’t be discouraged if you are one of those on the “brink”. . .you are not alone.
The report found that about 50% of the nonprofits have less than one month of operating reserves. Sounds bad — doesn’t it? In the work with our smaller clients it is not uncommon. It is a great idea to have operating reserves and even some donors will support that as a “funding priority.” The reality is that most of the needs out there far exceed our ability to put money away for a rainy day. In New Orleans almost a third of the charities disappeared after Katrina for lack of operating reserves but others stepped in to fill the gap.
One of the many challenges is that we work in a very competitive fundraising environment. There are 1.5 million charities of which the largest appear to be Donor Advised Funds like Fidelity. To meet the challenge you need a strong case/vision, a strong plan and some great fundraising development strategies that can be implemented (strategy without implementation is not workable). It costs money to raise money. Most if not all major donors understand this and the need for reserves. It is how you position it that matters.
One rule of thumb I use with my clients is this: if it costs $25,000 to fund a program, add 15% to the funds needed so that money can go back into operations and reserves. If you are raising money for a building, add 10% to the cost so funds can go into an endowment for funded depreciation (so you don’t have to raise money to replace the roof in the future, etc.). Know that donors will fund six months of operating reserves if it is part of a larger plan to meet your objectives to serve your community.
What is the number that you would like to raise over and above your annual budget to secure the future of your organization?
The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark.
Written by Paul D’Alessandro
Founder and Chairman
