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My goal in addressing the fact that nonprofits lack reserves is not to induce despair. Even in tight budget environments, you can begin to build and sustain reserves. Here are some practical steps to get started:
First and foremost, signal to your team and board that building a reserve is non-negotiable for long-term stability. Incorporate reserve targets into your strategic plan. For example, set a goal like “reserve equivalent to 3 months of operating expenses within 2 years, 6 months within 5 years,” or whatever suits your situation. By treating reserves as a strategic must rather than an afterthought, you change the organizational mindset. Remember, resilience is part of your mission – you can’t help others if you’re on the brink of collapse.
Work with your board to establish a clear reserves policy. This policy should define why you need reserves, how much you aim to hold, and when/for what purposes reserves can be used (if you intend any restrictions). Having the board formally approve of a reserves policy creates accountability and buy-in. It also educates board members (who may initially resist accumulating cash) that reserves are a prudent fiduciary practice, not a sign of diverting funds from programs.
Perhaps the most practical step is to build a modest surplus into your annual budget. This might sound counterintuitive in that nonprofits often feel every dollar must go to program delivery. But even a small, planned surplus (say 3-5% of revenues) consistently year over year will start to accumulate a reserve.
Lean strategic planning can help here. By using a Lean Strategic Planning approach, which emphasizes agility, focus, and continuous adjustment, you can prioritize initiatives and trim or delay lower-impact activities when money is tight, thereby freeing up some resources for reserves. The key is to avoid the trap of always budgeting to zero margin. Nonprofit is a tax status, not a mandate to spend every penny. As I often remind clients: aim to “break even + a little extra.” That “little extra” is the seed of tomorrow’s stability.
One reason reserves get depleted is overreliance on a single source of funds or on funds that are restricted. We’ve addressed donor concentration and underfunding in earlier discussions, so I won’t belabor those points, but conceptually, diverse and flexible revenue is the fuel for reserves. Make it a priority to cultivate unrestricted funding streams. This could mean growing individual donations (which are often unrestricted), launching an earned revenue venture, or negotiating with regular funders to allow a portion of grants for operating support.
Whenever you receive a restricted grant, see if you can allocate some overhead from it to cover true costs, thereby freeing other general funds to save. Educate your donors about why general operating support is so impactful. It underwrites the stability that makes program successes possible. Many funders are receptive to this if approached thoughtfully. The more “breathing room” in your revenue, the easier it is to carve out reserves.
Building reserves is fundamentally about managing risk. It’s acknowledging that the unexpected will happen and preparing for it. Our Foundations for Growth program is designed to equip nonprofits with a lean risk management framework that directly ties into financial resilience. By proactively identifying your biggest financial vulnerabilities, you can take steps to mitigate those risks before they become crises.
Often, one of the countermeasures will be “accumulate X months of reserve” for a particular risk scenario. Foundations for Growth helps your team embed such practices into daily operations. Incorporate reserve-building into your overall risk management and strategic growth plans. When you treat reserves as mission-critical infrastructure, just like you’d treat cybersecurity or program evaluation, you give it the attention and resources it deserves. Risk-aware organizations regularly set aside funds in good times to buffer the bad times, and they thrive because of it.
In tight budgets, finding money to set aside can feel like squeezing water from a stone. But even small moves add up. Here are some ideas:
Overall, apply a personal finance approach: automate savings whenever possible, such as establishing a policy that any surplus at year-end, no matter how small, is directed to a reserve account. Protect that nest egg!
Finally, make reserve-building part of your organization’s culture. Talk about it openly as a measure of strength. Help staff and stakeholders understand that a reserve enables you to take bold action when opportunities arise and to persevere when challenges come. When everyone from program managers to development officers internalizes that having reserves makes the mission stronger, they will be more likely to budget cautiously, fundraise for operating support, and celebrate financial wins that contribute to reserves.
We aim to change the narrative: having minimal reserves should not be considered normal or unavoidable. It should be viewed as an avoidable risk. And success should be measured not just by lives touched or funds raised, but also by whether the organization is here to serve next year and the year after.
Risk Alternatives enhances the resilience and sustainability of nonprofits through comprehensive tools, training, and support. For inquiries about conducting a risk inventory or other matters, please contact Risk Alternatives at info@tedbilich.com.