Are you trying to raise funds for a charity that appears to be flush with cash? 

This is a challenge many fundraisers face.  Having reserves is essential to the financial health of any organization.  But just how do you explain to donors what reserves are, and more importantly, why your charity needs them? 

There are many ways to interpret the term “reserve”.  Charities often have unrestricted, internally and externally restricted fund balances, and endowment funds.  What it boils down to is this: Reserves are a charity’s savings; a distinct group of net assets that a charity manages to achieve a specified set of objectives.  Why you need specific funds will determine the type of reserve you establish. 

There are essentially four different types of reserves:

1. Operating reserves

How do you ensure programming will continue if there’s a short-fall in funding in a particular year?  This is what the operating reserve is for.  It is money set aside in case, unexpectedly, revenue is down or expenses are up.  How much is set aside for “rainy-day” situations (times of need or trouble) depends on the risk profile of your organization.  Many charities choose to save three, six or even twelve months of normal operating expenses.  Operating reserves should be high enough to allow your organization to maintain sufficient liquid assets, and, what may appear to be, excess funds should be categorized into other reserves that are linked to the charity’s mission and activities.

2. Contingency reserves

Are changes in laws or regulations anticipated?  Are there plans for future restructuring? Is the charity’s pension plan in a funding deficit position?  These are just some reasons why your organization may need to establish a reserve for future events or liabilities.

3. Special program reserves

It’s always good to have and communicate a strategic plan.  But have you also set aside the funds to turn that plan into reality?  To establish a special program reserve to fulfil your strategic plan builds donor confidence and makes the strongest case for continued support.  “Support us because we have a real, achievable plan, and not just a fanciful strategy.” It is also within special program reserves that endowments and donor-restricted, multi-year contributions are tracked to ensure they are used in accordance with donors’ wishes. 

4. Capital reserves

This is a common one for charities.  Whether it is to renovate existing properties or for future building or expansion projects, the time to set aside the funds is before the project even begins to ensure there will be sufficient funding to completion.

There are many reasons to establish reserves.  They are not just beneficial –reserves are essential.  It’s really very simple:  Just as you and I need to personally save for “rain-day” situations, charities need to be financially prepared in the face of uncertainties.  What if that funding doesn’t come in?  What if the market declines again, as it did in 2008, and that investment income relied on doesn’t come through?  What if unemployment rates increase, disposable income declines, or donors just simply get nervous about their own financial stability and give less?  In any of these “what if” conditions, will sudden staff and program cuts be necessary? Without adequate reserves, many charities are forced to compromise fulfillment of their long-term mission just to “keep the lights on” in the short-term.

It is best practice for charities to be self-sufficient, be prepared for market-related risks, avoid unplanned or cost-reduction measures, and reduce the impact of risks. Reserves, when effectively explained in accounting policy notes or elsewhere, provide transparency and accountability, and give donors confidence that the charity is planning ahead and poised to fulfil its mission.  

For today, it’s enough to know what reserves are and why they’re needed. In future submissions we will help you know how to calculate, establish, and manage appropriate reserve levels for your charity, including real-life examples of how reserves planning can go wrong.  The more you know about reserves, the easier it will be to explain to your donors why your charity really does deserve and need their financial support.

Ninette Bishay is a senior manager at Grant Thornton LLP in Toronto, Canada, dedicated to serving the charities & not-for-profit sector.  The firm serves the audit, tax and advisory needs of many charities, large and small, in Canada.  You can reach Ninette at Ninette.Bishay@ca.gt.com or on her direct line at 416-607-2753.