There’s a new blog I discovered recently that I’ve grown to really like. Against the Grain, written by Rick Moyers of the Eugene and Agnes E. Meyer Foundation, is about challenging nonprofit boards to be more effective. Recently Rick has been writing about the need for nonprofit operating reserves. Operating reserves are simply an amount of set aside money that a nonprofit has accessible in times of crisis, budget shortfall, etc. In Rick’s most recent post on the topic, he explains how nonprofits can go about building operating reserves. And to him, it’s quite simple. But I would argue that Rick ignores a pretty ingrained nonprofit financial taboo against running a surplus.
Rick argues that creating operating reserves is fairly easy: “The most reliable way to build reserves is by operating at a modest surplus (bringing in more money than you spend) consistently over time.” And the way he suggests doing this is to have “the fiscal discipline to make hard choices and the ability to resist putting all “extra” money immediately into expanded programs and services.”
But Rick ignores the fact that in much of the sector it is unseemly for a nonprofit to operate a surplus. I cannot tell you how many times I have seen nonprofit leaders massage the budget projections accompanying a funding proposal in order to show break even or a loss in a given year. It is somehow inappropriate to show funders that the organization is too far into the black. And how many board meetings have been lost to a discussion about why money is sitting in a bank account instead of serving more people? Board members become quite uncomfortable when “too much” money is sitting idle. Because the question is always: if money exists, why isn’t it being plowed into more programs?
Indeed, it seems the majority of nonprofit organizations don’t enjoy much of a surplus. The 2011 Nonprofit Sector Survey conducted by the Nonprofit Finance Fund found that 60% of nonprofits reporting had less than 4 months of expenses as operating reserves and 28% of nonprofits had less than 1 month of reserves, which is essentially breakeven. Rick found similar results in a survey his foundation conducted in the Washington area.
But money sitting in a bank account serves a very real purpose for a nonprofit. It means the organization doesn’t live hand to mouth, no longer continually puts out fires, and stops expending energy on just keeping the doors open. Operating reserves allow an organization to evolve to the next level where they can think strategically, take some risks, streamline their business model, innovate their solution, and weather economic uncertainty all in the name of delivering bigger, better social impact.
So the nonprofit sector must get over the surplus taboo. It’s ok to run a surplus, in fact, a surplus means that the organization is better positioned to deliver more impact down the road. The key to financial sustainability, and ultimately significant social impact, is strategic financial management. And operating reserves are a first step to getting there.
Photo Credit: Jason Tester