The National Grants Partnership
Webcast & Teleconference
Nonprofit Operating Reserves Initiative
Prepared by:
Bill Levis
The Urban Institute
and
James C. Schmutz,
Merrill Lynch Financial Advisor
Contact: Bill Levis
E-mail: qrlevis@aol.com
or
James Schmutz
Email: James_Schmutz@ml.com
Phone: 202-659-6173
Agenda
 Nonprofit Operating Reserves Initiative
 Reserves Ratio
 It Depends!
 Financial Stability of Nonprofit Grantees How is it Relevant to the National Grants
Partnership?
 Appendix
 Internal Management Tool
 Acknowledgements
2
Nonprofit Operating
Reserves Initiative
3
Nonprofit Operating Reserve Initiative –
Reserves Ratio
 Nonprofit Operating Reserves Workgroup convened in spring 2008
 Purpose:
 Define Operating Reserves Ratio
 Bring focus to importance of financial stability
 Call to action – increase the number of nonprofits that maintain
operating reserves at levels adequate for achieving financial stability
4
Nonprofit Operating Reserves Initiative –
Reserves Ratio
 Why was the Nonprofit Operating Reserves Initiative Workgroup formed?
 Preliminary research indicates that a large portion of nonprofits may
not have sufficient reserves. For example, according to analysis of
IRS Form 990 data (2003):
 1,516 or nearly 50% of 3,154 nonprofits located in
Washington, D.C. had year-end operating reserves below
25 percent or less than 3 months of their annual expense
budget.
 In fact, 996 nonprofits (32%) had reserves of zero to 25
percent while 620 nonprofits (16%) actually had negative
reserves ratios.
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Nonprofit Operating Reserves Initiative –
Reserves Ratio
 What are operating reserves?
1. The portion of “unrestricted net assets” that nonprofits maintain as
‘rainy-day’ funds to weather unexpected setbacks.
2. “Unrestricted net assets” is a required line item in balance sheets in
audited financial statements and IRS Forms 990 (line 67) of not-forprofit organizations.
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Nonprofit Operating Reserves Initiative –
Reserves Ratio
 What are operating reserves?
Unrestricted Net Assets
Equity in fixed
Unrestricted Net Assets
Available
Unrestricted Net Assets
Operating Reserves
Portion of Unrestricted Net Assets
Board Designated
(Set aside for
strategic purposes)
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Nonprofit Operating Reserves Initiative –
Reserves Ratio
 Nonprofit boards need to establish a minimum Operating Reserves Ratio
policy.
Operating Reserves Ratio =
 A percentage: operating reserves divided by the annual expense
budget
 Or number of months: operating reserves divided by the average
monthly expense budget.
 Minimum operating reserves ratio suggested by the Workgroup, is 25
percent or 3 months of the annual expense budget.
8
Nonprofit Operating Reserves Initiative –
It Depends!
 What are adequate reserves for nonprofits to achieve financial
stability?
 IT DEPENDS!
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Nonprofit Operating Reserves Initiative –
It Depends!
Range of Factors
Concentrated Revenue Stream(s) greater than 15%?
Organization activity is more reactive/unpredictable.
Board of Directors Influence
Do they take long-term or short-term view?
 Budget & Planning – status quo, growth etc.?
Confidence in adequate backup sources for resources?
Volatility related to day-to-day revenue and expenses.
Decision to hold reserves
greater or less than 25% It Depends!
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Nonprofit Operating Reserves Initiative –
It Depends
 The Key Action – Establish a policy.
 Precisely because “it depends,” the Nonprofit Operating Reserves
Workgroup concluded that it would be appropriate for every
nonprofit organization to have a written Reserves Policy that
 defines its own “adequate” operating reserve level
 defines how its operating reserves are calculated
 provides the rationale that led staff and Board to this
conclusion.
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Financial Stability –
How is it relevant to the
National Grants
Partnership?
12
Financial Stability – How is it relevant to
the National Grants Partnership?
 80,000 nonprofit recipients of government grants that deliver services to
US citizens across the country on behalf of federal, state and local
governments.
 Government agencies that provide these funds need to take a special
interest in the financial stability of the nonprofit organizations in this service
delivery system.
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Financial Stability – How is it relevant to
the National Grants Partnership?
 There are a range of stakeholders that can influence establishing and
maintaining adequate Operating Reserves for financial stability:
 CEOs, CFOs and boards of nonprofit organizations
 Grant making community such as:
 program officers of foundations
 regional associations of grant makers
 GOVERNMENT AGENCIES
 Associations of nonprofits and umbrella groups – geographic
and subsector.
 Accountants such as individual CFOs and CPAs, CFO groups
and CPA societies
 Financial institutions serving the nonprofit sector
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Financial Stability – How is it relevant to
the National Grants Partnership?
 What can these stakeholders do to enhance financial stability
among nonprofit organizations?
 All stakeholders can encourage nonprofits to:
 establish comprehensive written Reserves Policies for
maintaining adequate operating reserves for financial stability
 employ budgeting and accounting procedures that implement
their Reserves Policy – effectively.
 Resource providers including government agencies, can permit and
even encourage their grantees to include surpluses for building
reserves in the administrative portion of their grant budgets.
15
Appendix
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Appendix – Internal Management Tool



The Nonprofit Operating Reserves Initiative understands the
sensitive nature and potential implications resulting from the
suggested parameters such as the 25% figure presented as
a benchmark, outlined in the White Paper. The group
understands that the content of the White Paper could be
misused as a performance metric if assigned blindly and
arbitrarily to a nonprofit organization.
With that in mind work group members were emphatically
unanimous in declaring that the results of this initiative were
intended for use and application as an internal management
tool for nonprofit staff and Boards.
Because of the “It Depends” factors, it is not intended for use
by “watchdog” groups or any other external observer. The
risk of not recognizing the unique nature of each nonprofit is
too great for the suggestions outlined in the White Paper to
be used without greater depth of knowledge of the nonprofit
organization.
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Appendix – Acknowledgements

Bill Levis and Jim Schmutz want to thank and acknowledge
all the people who have participated in the Nonprofit
Operating Reserves Initiative project process.
Nonprofit Operating Reserves Initiative Project Members
Rob Batarla, American Physical Therapy Association
Wendy Batkin, Nonprofit Consultant
Elizabeth Boris, Center Director, CNP, The Urban Institute
Mary Buszuwski, ANA
Gale Case, Rothstein Kass
Glenda Cognevich, DC Central Kitchen
Gail Crider, National Arts Strategies
Linda Crompton, BoardSource
Cami Cumblidge, Nebraska Council of School Administrators
Mary Ann de Barbieri, de Barbieri & Associates
Keith Danos, Jewish Federation for Group Homes
Tim Delaney, National Council of Nonprofit Organizations
Rick Dorman, GWSCPA
Phylis Edans, American College of Emergency Physicians
Ken Euwema, United Way of America
Bess Foley, Nonprofit Finance & Accounting Consultant
Carlos Gomez-Montes, United Way of America
Flo Greene, California Assn of Nonprofits
Bill Hamm, Foundation for Independent Higher Education
Bob Hawkins, concerned citizen
Marge Heitbrink, Wise Giving Alliance, CBBB
George Hergenhahn, Special Olympics Maryland
Deborah Hickox, Goodwill of Greater Washington
Maria-Nelly Johnson, Special Olympics District of Columbia
Lisa Junker, ASAE
Fred Lane, Center for Nonprofit Strategy and
Management, Baruch College/CUNY
Dick Larkin, BDO Seidman
(*) Bill Levis, Senior Associate, NCCS, The Urban Institute
Elaine Lynch, American Anthropological Assn
Dawn Mancuso, Association of Air Medical Services
Rick Moyers, Meyer Foundation
Patty O’Malley, Rubino & McGeehan
Tom Pollak, Program Director, NCCS, Urban Institute
Dennis Ramprashad, MillerMusmar, [Chair, GWSCPA QR Task Force]
Celeste Regan, National Park Foundation
Sally Rudney, The Montgomery County Community Foundation
Daniel Saat, Tides Foundation
Susan Sanow, Center for Nonprofit Advancement
(*) Jim Schmutz, Merrill Lynch
Jeff Schragg, Argy, Witse & Robinson
Cathy Stegmaier, Aliamce of Cambridge Advisors
Suzanne Stone, Society for Women’s Health Research
Janette Stout, Southeastern University Research Assn
Alan Strand, California Association of Nonprofits
Russy Sumariwalla, Global Philanthropy & Nonprofits
Russell Willis Taylor, National Arts Strategies
A Irene Tongelidis, Accounting and Consulting Services
Tim Walters, Association for Small Foundations
Bennett Weiner, BBB Wise Giving Alliance
Yonas Weldemariam, Society for Women’s Health Research
Brian Williams, Step Afrika!
Jack Ziegler, Movement Advancement Project/LGBT
Joe Zillo, Defenders of Wildlife
Steve Zimmerman, Spectrum Nonprofit Services LLC
(*) Bill Levis and Jim Schmutz collaborated to bring this group together and
establish the Nonprofit Operating Reserves Initiative.
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The National Grants Partnership
Webcast & Teleconference
Nonprofit Operating Reserves Initiative
Thank You
Comments, suggestions and questions are welcome:
Jim Schmutz, Merrill Lynch, James_Schmutz@ml.com
Bill Levis, The Urban Institute, qrelvis@aol.com
See also Nonprofit Operating Reserves Initiative White Paper at:
http://www.nccs2.org/wiki/images/5/50/What_are_Adequate_Nonprofit_Reserves.pdf