Reserves for your not-for-profit can be a valuable resource when unexpected challenges arise. Not-for-profits can use their reserve funds to address these unexpected situations and remain financially stable. Additionally, reserves demonstrate to your community and donors that your organization can continue to fulfill its tax-exempt mission during periods these challenging periods.
Your organization’s reserves must come from a designated pool of unrestricted, liquid assets. Other than that, the Internal Revenue Service (IRS) does not have standard guidance about what an organization’s reserve level should be. The appropriate amount will vary from organization to organization because the reserve should reflect specifics about your level of risk, financial performance, corporate structure and business model.
It is important that an organization is able to defend its reserve level determination because it is an area of public and regulatory scrutiny. A high reserve amount may look like an organization is “hoarding” funds in its reserves and draw criticism.
Since each organization is different, there is no single benchmark for determining the appropriate reserves that applies to all not-for-profit organizations. However, in our latest MHM Messenger we’ve provided a five-step process to help you determine a reasonable reserve level for your organization.