Many people, even those with a financial background, have difficulty with the nonprofit sector’s accrual accounting standards. Most of us think in terms of cash accounting: Do I have enough money in the bank or do I need to charge it? With accrual accounting, it can be easy to believe your organization has enough cash, only to discover that what seemed to be a healthy bottom line was masked by restricted funding.
Nonprofit organizations cannot be sustained without a financial reserve. A quick way to gauge this important part of sustainability is to look at the unrestricted income and reserves. Are they clearly presented in your organization’s financials? Are they adequate?
Determining the appropriate amount of unrestricted funds for an organization depends on several factors, including the goals outlined in the strategic and other organizational plans, historical and projected cash flow, and the organization’s ability to manage emergencies. Some nonprofits seek a three-month operating reserve as a cushion for tough times – others want up to a one-year reserve. Whatever the amount, it should be sufficient to allow the board and staff to manage cash flow and accomplish their vision.
Look at your reserve account. Does it allow you to implement your strategic and annual plans during tough times?
Dennis McMillian, is President of The Foraker Group, a capacity building organization based in Alaska, and the author of Focus on Sustainability: A Nonprofit’s Journey.