ACPNS Blog

Is it raining yet? When and how should financial reserves be used?

Dr Glenn Poole 

Many organisations set funds aside for a rainy day.  Over the last six to nine months communities in Australia have experienced drought, bushfires, floods and a global pandemic.

These have been trying times for most nonprofit organisations.  Treasurers and board members have felt the pressure of managing their organisation’s finances.

So, what about those reserves that were put aside for a rainy day.  Is it raining yet?

A decision to set funds aside for the future and not apply them now to the services and purpose of the organisation can be a challenging one for boards.  There are pressures from donors and the community to apply all available funds to the organisation’s immediate operations.  But board members also need to be concerned about the future sustainability of the organisation and its ability to continue to deliver its services.

If an organisation has managed to build up some level of financial reserves, there will then be the pressure to maintain those reserve funds – for the future. At what point does a board decide to unlock its reserves and allocate some of those funds to support current operations in the face of reduced income from other sources.

Research undertaken at ACPNS over recent years has explored aspects of the financial sustainability of nonprofit organizations and their use or absence of financial reserve funds.

In 2012 Dr Mike Booth studied the financial reserves in Australian International Aid organisations and their contribution to sustaining nonprofit organisations.  Dr Booth attempted to shine a light on the paradox inherent in the view by many members of the public that organisations should not hoard funds against the common sense need for a financial buffer for unexpected future events.  He identified that there appeared to be two groups of organisations – the savers who build reserves and kept money in the bank and the spender-deliverers who put their resources in the ground funding their immediate services.

The research program at ACPNS continues to explore issues related to financial reserves and financial vulnerability of nonprofit organisations.

More information on ACPNS research publications is available here.

In addition to the academic research, the Australian Charities and Not-For-Profits Commission [ACNC] released a facts sheet in 2016 on “Charity Reserves: Financial Stability and Sustainability”.  This facts sheet provides guidance for charities on reserves – what they are, why reserves might be needed, what might be an appropriate level of financial reserves and when might the reserves be used and for what purpose.

Is it raining yet?  – Some thoughts:

  1. Has your board articulated a policy for holding financial reserve funds? Does the policy discuss:
    1. the reasons for holding reserve funds,
    2. the level of reserve funds that might be appropriate for your organisation given its size, sources of revenue and the volatility of revenue streams, the volatility of expenditure needs and the capacity for the board to predict future trends in your operating environment,
    3. the events or circumstances that may trigger the use of the reserves, whether all or only part of the reserves can be used in a certain period and how and when the reserves are to be re-established.
  2. Have your stakeholders [donors, clients, staff and the local community] been involved in discussions on the reserves policy and its impacts for the organisation.
  3. How will your decision to use or not to use the financial reserves be communicated to your stakeholders in the current operating environment.

Although a decision to set funds aside for a rainy day may be difficult, the decision to declare that it is in fact raining and to draw down on those reserves also provides challenges for any nonprofit board.  Careful and fulsome communication with all stakeholders about the needs of the organisation and its financial viability will be vital.

 

Did you know …..

ACPNS offer courses for staff, board and other volunteer professionals who work, or are entering the philanthropy, nonprofit or social enterprise sectors.  There are units that deal specifically with governance and accounting and financial issues.

 

References:

The Australian Charities and Not-For-Profits Commission (ACNC). (2016). Charity Reserves: Financial Stability and Sustainability [Fact sheet]. https://www.acnc.gov.au/tools/factsheets/charity-reserves-financial-stability-and-sustainability.

Booth, M., Irvine, H., Ryan, C., & McGregor‐Lowndes, M. (2017). Spenders or Savers? An Examination of the Reserves of Australian NGOs. Australian Accounting Review27(3), 248–262.

Booth, M. (2012). In the bank or on the ground : an examination of financial reserves in Australian international aid organisations. Queensland University of Technology. Available at: https://eprints.qut.edu.au/54669/.

Ryan, C., & Irvine, H. (2012). Not-For-Profit Ratios for Financial Resilience and Internal Accountability: A Study of Australian International Aid Organisations. Australian Accounting Review22(2), 177–194.

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