Money Counts!

Nonprofit organizations are making an important contribution to the social and economic fabric of our communities. Despite the wealth of numerous volunteers and donations generously provided to the nonprofit sector, it still takes money to deliver quality programs and services for the betterment of society. However, this doesn’t mean that nonprofits can’t make a profit. The difference is how profits are distributed.

One of the fiduciary responsibilities of board members is the Duty of Care, which states that board members owe the duty to exercise reasonable care when he or she makes a decision as a steward of the organization. Understanding the financial position ensures the financial health of the organization begins with monitoring the financials. Financial performance can easily be measured through three financial statements – the balance sheet, the income statement, and cash flow projections.

There are several components that contribute to a financially healthy organization. Organizations that are committed to income-based spending, as opposed to budget-based spending, tend to avoid overspending available income whether it is budgeted or not. Additionally, vibrant organizations need a stable source of income to continue its programming and ensure its credibility into the future.

Strategically planned reserve funds can provide stabilization by creating an internal line of credit for periodic cash shortfalls. These reserve funds can even-out cash flow, stabilize operating gaps, or allow you to take advantage of opportunities in a timely fashion. While it is important that policies are in place as to how the reserve funds can be used, reserve funds demonstrate financial acumen and fiduciary responsibility on the part of the nonprofit’s management and board. While having a surplus does not indicate a nonprofit’s success, it is an indicator of strong financial health and stability.

Operating reserves are typically developed by funding depreciation. However, they can also derive from an unexpected surplus or through a specific fundraising effort. Achieving reserve funds generally requires sound budgeting techniques. Another option is through loans, but the terminology often changes from “reserve fund” to “working capital” though the concept is similar. Nonprofits with reserve funds have more choices, more staying power and often, more capacity.

Can surpluses hurt you? In the extreme, if a nonprofit is generating large surpluses year-after year, it may fall under IRS scrutiny as the funds are never reinvested in mission-related activities. They may also be used against you when raising funds from private or public funders and a grant may be denied.

According to Kate Barr of the Nonprofit Assistance Fund in her article about operating reserves (http://www.nonprofitsassistancefund.org/), a commonly used reserve goal is three to six months’ expenses. At the high end, reserves should not exceed the amount of two years budget; and at the low end, reserves should be enough to cover at least one full payroll. Again, nonprofits can make a profit. The different is how those profits are distributed.