Developing a reserve fund is a crucial part of maintaining your nonprofit’s stability and sustainability. As YPTC’s nonprofit financial management guide explains, “When you’re in survival mode, you might spend every dollar that comes in. To be sustainable, make sure you’re building an operating reserve. This can help provide a safety net during times of uncertainty, economic downturns, or other adverse circumstances.”
However, donors might wonder why or how you’re generating enough funds for a reserve in the first place. They might ask themselves: “Does this organization truly need my contributions if they already have enough extra funds leftover to put in reserve?”
To help you balance building your reserve and retaining donor support, this guide offers tips for advancing your reserve strategy while reinforcing donor confidence.
Do you hesitate to show donors that your nonprofit is generating a surplus? It’s common to worry that having surplus funds may lead supporters to think that you don’t need their donations. Given the nature and purpose of nonprofits, many people assume these organizations can’t turn a traditional “profit” at all.
While it’s true that nonprofits don’t use extra funds to compensate shareholders, that doesn’t mean they shouldn’t generate extra funds to fuel their missions. In reality, generating a surplus is necessary and best practice, as it allows nonprofits to manage risk, invest in infrastructure, and expand their impact.
One of the many ways nonprofits use surplus funds is to build a reserve. Often referred to as a “rainy day fund”, a healthy reserve fund ensures that the organization can cover its short-term obligations and continue delivering on its mission in the event of an unexpected occurrence like an economic downturn or a loss of a major funding source.
Nonprofits also use surplus funds to invest in critical infrastructure such as facilities, equipment, and technology. These investments support operational efficiency and mission delivery.
By reframing the way you speak about surpluses and reserves, you can indicate to donors that your reserve fund is an integral part of your organization’s strategy and future, not just leftover revenue without a clear purpose. For example, instead of calling your reserve a “rainy day fund” or savings account, refer to it as something like:
These names reflect the thought and intention associated with building your reserve fund. When donors see that their contributions are still going toward your mission, whether directly or indirectly, they may feel more comfortable continuing their support.
Donors can lose confidence when a nonprofit’s financial decisions seem arbitrary. Gain supporters’ respect by implementing and sharing a detailed operating reserve policy that clarifies the following:
Share your initial policy draft with your board for their feedback and approval. Once you’ve finalized your reserve policy, you can implement it and be prepared to refer to it during discussions with concerned donors to ensure they understand your approach.
If you share your financial statements with donors, they may look at your nonprofit’s balance sheet, see a large cash balance, and assume you have enough already. However, they may not know to look further down at your net assets, where a significant portion may be tied up in donor restrictions.
To help donors understand that you may have less cash readily available than they think, proactively educate them about the difference between funds with and without donor restrictions.
Explain that while regular donations made through your donation page are typically unrestricted, other contributions, like major gifts, planned gifts, grants, and corporate sponsorships, may have a specific purpose or timeframe attached to them. In these circumstances, your nonprofit must use contributions according to the contributor’s instructions, meaning these funds are unavailable for building your reserve or supporting any other general operations need.
By breaking down the misconception that your nonprofit already has enough cash on hand to support priorities like a reserve fund, you can help build your case that donors’ contributions are always welcome and needed for you to continue serving your community over time.
Letting all your reserve funds sit in a standard checking account can be a disservice to your team, stakeholders, and beneficiaries. Once you reach your baseline cash flow needs, consider strategically investing excess reserves with an aim to generate passive income to support your mission.
Develop an investment policy statement (IPS) that outlines your investment strategy. Your IPS should include elements like:
This document should contain specific, actionable language that staff members can easily understand and implement. For example, instead of saying your organization will accept “moderate risk,” specify the exact metrics you’ll use to measure risk, such as the maximum percentage of unrealized loss, strategic asset allocation range, or acceptable value at risk (VaR).
For assistance with creating your IPS and managing your investments, consider partnering with an investment advisor.
Knowing how much money you have in reserves isn’t necessarily useful to donors. What is helpful is knowing exactly how those funds can help support your mission and sustainability.
Focus external communication on your organization’s commitment to sustainable mission impact. For example, an animal shelter organization may say something like:
Our financial health and commitment to sustainability help ensure the cats and dogs in our care remain safe, fed, and warm without interruption.
This statement specifies the mission-related purpose of the organization’s financial health and explains that it’s necessary to maintain high-quality continuity of care for the shelter animals. When donors understand how you use your reserves to support your mission, they’ll be more willing to contribute, knowing their donations may go toward these essential funds.
As your organization builds its reserves, prioritize building strong relationships with donors as well. By remaining open and transparent about the purpose of your reserves, you’ll demonstrate your commitment to keeping supporters informed and continuously improving your ability to uphold your mission.