Financial Resilience for Nonprofits: Navigating Uncertain Times

Source: McKonly & Asbury

Given the present uncertainty that is a reality for many nonprofits, particularly with the fluctuations in federal funding, it is important to consider the factors that allow an organization to continue fulfilling their mission regardless of the economic or political environment. To establish a sustainable organization, nonprofits must prioritize building and maintaining adequate reserves. Whether it be COVID-19, a new administration in the White House, or whatever may come next, nonprofits should proactively develop strategies for navigating adverse conditions. As the saying goes, they must be “hopeful for the best but prepared for the worst.”

The Importance of Reserves for Nonprofits

Reserves serve as a financial safety net when organizations experience funding shortfalls, economic downturns, and unforeseen expenses. Without sufficient reserves, organizations may struggle to pay their employees, cover operational expenses, or continue fulfilling their mission. In addition to creating a safety net for adverse conditions, strong reserves signal financial health to donors, grantors, and other partners, fostering trust and confidence in the organization’s long-term sustainability.

Here are four strategies nonprofit organizations can take to strengthen reserves and improve financial sustainability.

1. Establish Operating Reserve

Establishing an operating reserve should be a priority for every nonprofit organization. These funds should be liquid and accessible for covering unplanned expenses and neutralizing the effect of budget deficits. According to PANO’s Standards for Excellence #9 Sustainability and Sustainability Planning, “Organizations without a sufficient operating reserve are inherently focused more on the short-term challenges and crisis-based decisions and will become distracted from sustainably accomplishing its mission.” While benchmarks vary, experts often recommend three to six months’ worth of operating expenses in unrestricted reserves. However, organizations with higher reliance on government grants may need to maintain closer to nine to twelve months of expenses in reserves.

2. Fund Depreciation

Funding depreciation consists of funding the operating reserve in amounts equal to the depreciation recognized on an asset each year. If depreciation is budgeted correctly, the asset will have zero value at the end of its useful life. If the organization funds depreciation, it will have sufficient cash in reserves to replace the asset with one of equal value. These depreciation-matching deposits into the operating reserve will directly build future value for the organization.

3. Diversify Funding Streams

Relying too heavily on a single funding source or demographic increases financial risk. While it is important to analyze donor data and create more targeted campaigns, nonprofits should consider expanding revenue through grants, corporate sponsorships, and earned income strategies to create a more stable financial foundation.

4. Invest Wisely

Nonprofits should consider low-risk investment strategies that align with their liquidity needs while allowing reserves to grow over time. For additional information related to nonprofit investment strategy, check out the webinar conversation with Courtney Dean, Nonprofit Investment Advisor from eCIO, “Investing for Success as a Nonprofit Organization.”

Strengthening Financial Resilience in an Uncertain Future

With uncertainty abounding, nonprofits must be proactive about building a plan for sustainability. Nonprofit organizations often have inspiring missions consisting of a grand vision for a better world. Nevertheless, it could all quickly come to a halt if they fail to establish and maintain adequate reserves. By implementing sound financial strategies, nonprofits can build resilience and thrive, even in the midst of challenging times, freeing them up to accomplish their mission and serve their communities.

If you have questions about the information outlined above, please reach out to a member of our Nonprofit team. You can also learn more about our nonprofit services by visiting our Nonprofit industry page.

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