How much of a reserve fund should you have?
We can debate exactly how much is too much some other day,
The challenge we all face is finding that balance between “Money” and “Mission.” Nonprofits don’t exist to “make money.” But we need it to fuel our efforts – short run and long run. This past Spring I co-taught a graduate fundraising course for our Center for Philanthropy & Nonprofit Leadership at University of Maryland. Our mantra was “No Money, No Mission.”
If your organization wants to exist to serve others in the long run – which most nonprofits do – then I suggest that you budget effectively for the long run by proactively setting up a Long Term Investment Fund.
Here is the budgeting process I recommend:
- Conservatively forecast revenue. NOTE: Don’t start with expenses on what you WANT to spend. Start with reasonable forecasts for revenue and then set expenses. Otherwise, you will tend to overestimate revenue.*
- Liberally forecast expenses for programs/activities that you would like to undertake.
- Add an additional expense line in the amount of 2% of revenue for “Long Term Investment Fund”
- Eliminate expenses until you have a projected surplus of 2% of revenue
If you follow this faithfully then you should produce a solid surplus every year that can go into your Long Term Investment Fund (reserves).
And yes, you will probably have to cut some funding from programs in the coming year in order to meet the surplus and reserve targets. Maybe you don’t get all the way to the 2% targets in the first year you do this, but I encourage you to work toward them. Otherwise, you will never have enough of a reserve.
This is really not about Money vs. Mission. It is about Mission today or Mission today AND tomorrow. It is hard to discipline one’s self for today because you are CEO now or Board Chair now, but you need to think of tomorrow and being prepared to withstand another Great Recession. Those you serve will need you then even more than they do now – and you need to be there!
No Money No Mission!
*Forecasts are reasonably predictable – based on data. Goals are what you WANT. Forecasts are what you are sure of and they belong in budgets – not goals.