As a board member I’m always interested in what best practices are. We’ve had some discussions on one board that has two issues in my mind: one, how much we should keep in reserves to balance prudent management with not seeming too flush for more funding; two, being thoughtful about balancing perceived high overhead expenses with good investment in capacity.
I was in a funder meeting yesterday and the speaker made a reference to less than 30% of nonprofits meeting a standard of 6 months expenses in operating reserve. She referenced the Nonprofit Finance Fund as the source of that standard but what I actually see is the stat that 31% did not have 3 months of expenses. So I take it that a nonprofit should have at least 3 months in reserves, and that someone from Grantmakers For Effective Organizations has it in her head that 6 months is a good idea.
Here’s Tips for Navigating the Recession that has some useful advice on watching the budget. The liquidity measures resonate for me – my nonprofit has been talking about tracking our restricted vs unrestricted funds. Interestingly in the funder discussion someone made the point that if you want your grantees to be adaptable in times of stress, their funding has to have unrestricted components so they CAN adapt. Otherwise funders can hamstring grantees to be unable to respond to changing economic conditions. I thought that was a great point.
From the Recession Tips:
Determine possible reductions, delays, or losses of particular revenue streams:
- Government contracts or grants.
- Foundation and corporate giving.
- Individual donations and special events
Conduct program economics analysis:
- Know whether surpluses in some programs are subsidizing deficits in others.
- Assess which program affect overall financial health most and evaluate their mission impact.
- Consider whether demand for specific programs will increase or decrease in a recession
Assess current levels of liquidity, using multiple measures:
- Months of expenses covered by cash.
- Working capital — current assets less current liabilities.
- Liquid net assets — not all unrestricted net assets are available for general operations
Determine availability / use of any reserve funds for “rainy days.”
Make sure cash deposits are insured or distributed among banks and investments are varied.
For future reference on program/administrative/fundraising, here’s a set of papers that noodle on issues to consider around overhead and expense reporting, but they don’t put out any hard standards.
Finally here’s the Charity Navigator site page that talks about how they evaluate overhead expenses.