Many nonprofit organizations struggle to make ends meet, and building a reserve is only a dream on the horizon. But other organizations have found themselves with a significant amount of unrestricted net assets on their statement of financial position. This situation frequently prompts the question – “How much is too much?”
Of course, building a reserve sufficient to cover the organization’s needs is prudent and necessary. How much should that reserve be? It depends on what your organization does, how it is paid, what the billing and collection cycle looks like, and any number of other factors. As a point of reference, the BBB Wise Giving Alliance Standards for Charity Accountability (http://www.bbb.org/us/standards-for-charity-accountability) recommends that unrestricted net assets available for use should not be more than three times the prior year’s expenses or current year’s budget.
This is a good rule of thumb, but doesn’t cover every situation. It is important that you are aware of your organization’s financial position and how an outside observer may interpret it. Understand where the organization is in its lifecycle, what strategic plans are in place that will draw on those reserves, and how the organization is managing the process. Be prepared to answer the question, “How much is too much” for your organization.