How to Build a Financial Reserve Fund for Your Nonprofit

If there’s one thing that most nonprofits are familiar with, it’s unpredictability. Changes in anything from government policies to the economic landscape to natural disasters can cause ripple effects that affect a nonprofit’s cash flow. 

That’s where a financial reserve fund comes in. Designed to give your organization a financial cushion, a reserve fund can help you continue covering expenses when revenue doesn’t come in as expected. It can also give your organization more breathing room to make thoughtful decisions instead of reacting to every financial setback as an emergency.

But building these reserves doesn’t happen overnight. In this guide, we’ll walk through what nonprofit reserves are and how you can build them with some advice from Julie Macaluso, Vice President of Commercial Banking here at Amplify Credit Union.

What are financial reserves?

In short, financial reserves are your organization’s savings. These are funds set aside specifically for when your normal cash flow is disrupted or an unexpected need comes up.

“Your nonprofit might need to tap into its reserves if a major source of funding is delayed or a surprise expense puts pressure on your operating budget,” Macaluso says. “Having money set aside can give you more time to respond without immediately cutting programs or scrambling to find another source of funding.”

It’s also important to distinguish financial reserves from the cash your organization uses for everyday operations. Money that’s already earmarked for things like payroll, rent, programs, or any other upcoming expenses isn’t necessarily part of your reserves. Similarly, donor-restricted funds shouldn’t be classified as reserves since these may only be used for their designated purpose.

Macaluso reminds organizations that the reserve fund should be a financial buffer. “You shouldn’t plan to rely on it regularly, but having it available can help your organization continue operating when something doesn’t go according to plan,” she says.

Of course, that brings us to an important question: How big should that buffer actually be?

How much financial reserve should your nonprofit have?

A big question many nonprofit organizations have is about how much money they should aim to keep in their financial reserves. Because organizations can vary so much in their expenses, funding sources, and financial needs, there’s no one-size-fits-all answer.

“A good starting point for your financial reserves is three to six months of operating expenses,” Macaluso explains. “It’s very similar to building your own personal emergency fund. You want to be able to cover the cost of keeping your nonprofit afloat.”

From there, consider what makes sense for your particular organization. A nonprofit with predictable revenue and diverse funding sources may feel more comfortable toward the lower end of that range. On the other hand, an organization that relies heavily on seasonal fundraising or a small number of major donors may want a larger cushion.

Macaluso encourages organizations to set a number and make a plan. 

“Three to six months of expenses can feel like a big number, especially if you’re starting from zero,” she says. “But you don’t have to fund your entire reserve at once. Once you’ve established a target, you can develop a plan for gradually working toward it.”

5 Ways to Build Financial Reserve Funds

Once you have a goal in mind, the next step is figuring out how to get there. For many nonprofits, this won’t happen overnight. Instead, you can work towards your goal over time while putting some structure around how those funds are managed.

1. Create a financial reserve policy.

Before you begin to build your financial reserves, it can help to create a policy that outlines what the fund should look like and how it should be used. Developing a written policy gives your organization a shared set of guidelines to follow, both while you’re building the fund and when it comes time to use it. 

“Start by outlining your fund’s purpose,” Macaluso recommends. “Then answer some important questions. What situations would justify using the money? Who has the authority to approve a withdrawal? And if you do use your reserves, what is the plan for building them back up?”

Your policy can also establish your target reserve amount, where the funds will be held, and how your nonprofit will contribute to the account over time. It doesn’t need to be complicated, but it does need to establish a shared understanding of what the money is for and how decisions will be made.

2. Treat your reserves separately from working capital.

As you start putting money aside, make sure your financial reserves don’t simply blend in with the cash your nonprofit uses for everyday operations. 

Macaluso explains that the easiest way to do this is to simply keep the funds in a different account.  “Having a separate bank account for your financial reserves can make it easier to see how much you’ve saved and reduce the temptation to dip into those funds for routine expenses,” she says. 

A separate account can also make it easier to measure your progress toward the reserve goal you’ve established in your policy. Instead of trying to determine how much of your checking account is truly available for emergencies, you have a much clearer picture of what you’ve set aside.

3. Build reserve contributions into your budget.

The big question most nonprofits ask themselves is where the money will come from. The best way to make consistent progress is to simply treat reserve contributions as part of your nonprofit’s regular budgeting process. 

This doesn’t mean you have to set aside a large amount every month. Depending on your cash flow, you might contribute a set amount each month, designate a percentage of unrestricted revenue, or make larger contributions when your organization ends a period with a surplus. And if your financial position changes, you can always revisit how much you’re contributing. You may be able to increase contributions during stronger fundraising years and scale them back when cash is tighter.

“If you’re starting from scratch, don’t let a lofty goal discourage you,” says Macaluso. “Start with an amount your organization can realistically afford and build from there. What matters is consistency.”

4. Take advantage of interest-earning opportunities.

Your reserves shouldn’t just sit idle when they aren’t in use. Because you may go months or years without needing to tap into the full balance, keeping your reserves in an interest-earning account can help you make a little more progress towards your goal.

A high-yield business savings account can be a particularly good place to store your nonprofit reserves. This type of account allows you to keep the money separate from your everyday operating funds (which are presumably in a checking or similar account) while earning a higher annual percentage yield (APY) than you might get with a traditional savings account.

“Your reserve fund needs to be accessible,” says Macaluso. “But that doesn’t mean it can’t be working for your organization in the meantime. A high-yield savings account can give you the balance between keeping funds liquid and earning interest.”

When comparing high-yield savings accounts, pay attention to more than the advertised APY. Look at whether there are minimum balance requirements, withdrawal restrictions, or other account terms that could affect how easily your nonprofit can access its money.

Even if the interest you earn doesn’t seem significant at first, it can add up as your reserve balance grows. And when you’re working toward several months of operating expenses, every dollar counts.

5. Don’t let fees eat into your reserves.

Earning interest is great, but it can be counterproductive if you’re also losing some of those earnings to account fees. When choosing where to keep your reserves, pay close attention to monthly maintenance fees, minimum balance requirements, and other costs that could chip away at your savings. 

“Take the time to review the fee structure of the bank account that your funds are sitting in,” Macaluso advises. “If you’re losing money each month to banking fees, consider exploring a different institution.”

Give Your Nonprofit More Financial Breathing Room

Building a financial reserve fund takes time, and you don’t have to reach your goal overnight. Start by deciding what a healthy reserve looks like for your organization, create a policy for managing it, and make regular contributions when your budget allows.

“Having reserves gives your organization options,” Macaluso says. “When something unexpected happens, you have more time to look at the situation and determine the best path forward without wondering how you’ll get through the next month.”

Ultimately, that’s what a financial reserve is there to provide. You can’t predict every challenge your nonprofit will face, but you can put your organization in a stronger position to respond when one comes along.