Preparing for the unexpected is a given in the nonprofit sector. Because nonprofit leaders know that their organization’s financial status can change relatively quickly, especially if a major funder discontinues support.
A 2023 study of nonprofit financial health uncovered the troubling reality that many nonprofits face: In 2022, there was a 10% decrease in donor participation compared to the previous year. Although many nonprofits have also reported positive trends, such as an increase in the size of monetary contributions, there is always a level of uncertainty when it comes to an organization’s economic circumstances.
Agility just might be the key skill for moving forward. As the pandemic demonstrated, finance leaders who were able to adapt and react to changes in real time were better positioned to lead their organizations toward sustainability and, ultimately, growth.
“Each organization should set a reserve goal that is responsive to the point it is at in its life cycle and that is based on its unique cash flow and expenses.” — Janet McDaid, Partner at Han Group
This is why creating a reserve plan is so important. When an unexpected event takes place or an opportunity arises for which an organization must draw on its reserves, it’s critical to plan for the use of reserves. Equally important is the plan to replenish those reserves.
Han Group partner and CPA Janet McDaid works with clients to provide guidance to assist with their planning to establish solid financial footing. Here are three considerations she raises with clients to help them plan ahead.
- Set your planning goal. A common goal is to save three to six months expenses, but there are variables unique to your organization that you’ll need to consider. For example, are you operating with an overall positive cash flow? Are there unrestricted net assets available for designation? Addressing these before establishing a reserve will make your goals more achievable.
- Identify the tight times of year. If you have major seasonal earnings (e.g., if all your money comes in when you have your annual conference or gala), develop a plan for the non-revenue earning times of the year. Each organization should set a reserve goal that is responsive to the point it is at in its life cycle and that is based on its unique cash flow and expenses. The three-to-six month benchmark is a good rule of thumb to provide a reserve adequate to manage either anticipated or unexpected slower times. Map out anticipated cash flow and consider moments that may require temporary backup funding.
- Understand the risks of taking on a line of credit. When considering whether to seek out a line of credit, it’s important to remember the tradeoff. A line of credit can help in paying for unexpected expenses. But it’s ultimately a loan product and may not be the best option if you don’t have a clear plan for repayment of both the principal and interest.
Still have questions or unsure of how to proceed? Reach out to Han Group. We are here to help!
