Take the Risk Assessment Quiz
The data was looking worrisome even before federal policy shifts cratered nonprofit finances.
Many nonprofits operate with little to no financial reserves. In plain terms, they’re running on empty, living paycheck to paycheck organizationally. One financial setback could throw them into crisis. This affects the mission throughout the nonprofit sector: when you’re one shock away from insolvency, you can’t plan with confidence or take prudent risks. Every minor funding gap becomes a fire drill.
This lack of “rainy-day funds” was a major challenge in late 2022, when I published Managing Your Nonprofit for Resilience. What’s the current status? I address that below.
In late 2022, nonprofits were emerging from the pandemic’s economic rollercoaster. Many had grown their reserves during 2020-2021 thanks to federal emergency relief and unusually flexible grant funding. However, since late 2022, the landscape has shifted. High inflation and economic uncertainty have eaten away at those gains. Inflation in 2022 hit a 40-year high, driving up costs for nonprofits and eroding the value of cash reserves. While inflation cooled to about 4% in 2023, it was still enough to wipe out any growth in charitable giving. In fact, total U.S. donations in 2023 declined slightly more than 2% after adjusting for inflation. In short, donor dollars didn’t stretch as far.
Donor behavior and funder restrictions have also influenced reserve-building efforts. On one hand, the pandemic sparked greater appreciation among funders for unrestricted support. Foundations and major donors in 2020-21 loosened restrictions, allowing funds to be used for general operating needs. Those practices helped some nonprofits direct surplus funds into reserves. But by 2024, some of that unrestricted giving had faded. Anecdotal reports suggested some funders had reverted to restrictive grants, making it harder to carve out money for reserves.
Donor hesitancy in the face of economic jitters has also made fundraising for reserves tricky. It’s hard enough to raise funds for programs; asking donors to give to an “operating reserve” can be a tough sell unless you educate donors on why it matters for mission impact.
The broader economic trends since 2022 have been a mixed bag for reserve levels. The stock market’s recovery in 2023 boosted some endowments, but that mostly helped larger institutions, and often those funds are restricted. Meanwhile, labor market shortages forced nonprofits to increase wages to retain talent, a necessary move, but one that drew down surpluses faster. Organizations that entered 2023 with modest reserves found rising costs quickly chipping away at their cushion. We also saw the expiration of one-time COVID-19 relief funds. Many nonprofits that enjoyed unusual surpluses in 2021-2022 had to start spending those down by 2023 to fill budget gaps when government aid and emergency philanthropy subsided. The net effect by mid-2025 is that reserve levels have likely flattened or even dipped for many organizations.
Finally, federal policy changes since January 20, 2025, the start of the second Trump Administration, have impacted nonprofit finances. In early 2025, there were sudden shifts in federal funding posture (amply documented in these posts). A sweeping executive action briefly froze all federal grants and contracts in late January, as the new administration reassessed spending. Although a court quickly halted the blanket freeze, the incident sent shockwaves through the sector. Some nonprofits faced delays in payments and uncertainty for weeks. Certain fields, like international aid and social services reliant on federal funds, still encountered broad cuts and slowdowns.
On a more positive note, there’s growing advocacy for policies that support reserve-building. Sector leaders are urging the government and foundations to allow more flexibility in funding. For example, letting nonprofits retain unspent grant funds for reserves or providing capacity-building grants earmarked for financial stability. As of mid-2025, however, no major new federal incentives specifically for reserves have been enacted. For now, nonprofits must largely rely on their own strategies and savvy to build reserves in a challenging environment.
Does the nonprofit world have a reserve problem to the same degree it did in 2022? The answer is nuanced. In some respects, there has been improvement. Thanks to the pandemic-era wake-up call, more organizations recognize the importance of reserves and have tried to build a buffer. As noted, a larger share of nonprofits report having at least a few months of cushion today than was typical pre-2020. Financial practices are shifting gradually – it’s less taboo to talk about operating reserves and even surpluses. Boards and funders alike have heard the message about resilience. In that sense, the challenge of “lack of reserves” is more widely acknowledged now than before, which is a positive step.
However, the core challenge remains very much alive in 2025. Indeed, by some metrics, it may be getting harder again to maintain healthy reserves. The economic stresses of the past two years (inflation, labor costs, market volatility, political gamesmanship) mean that even nonprofits that built up savings have been dipping into them to cover budget shortfalls. Remember that roughly one-third of nonprofits do not have six months of cash saved, and many of those have well under three months, which is a perilous position.
We must also factor in new threats. The early 2025 federal grant freezes showed that funding volatility can strike unexpectedly. That episode made the lack of reserves challenge even more salient – it’s a glaring vulnerability that has not been solved by the modest gains of the past few years.
In summary, the challenge has improved on the surface for some organizations, but it remains deeply relevant and, in many cases, just as severe. The fundamental risk of operating without a safety net is still one of the biggest resilience issues nonprofits face in 2025. I will explore strategies to build reserves in my next post.
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.