Your organization’s financial reserves are a discrete subset of all its net liquid assets. Distinct from day-to-day finances, an organization’s operating reserves exist solely to minimize (or, in the best case circumstances, mitigate) unexpected financial events such as a loss in funding, or sudden uptick in service requirements that requires unplanned strategic movement.
Not every organization should adopt the same reserve building policy however, in part because not every organization has the same reserve building capacity.
For instance, some of the factors that should be analyzed on a case-by-case basis when creating or implementing a new reserve policy are:
- The speed with which your organization can build (or re-build) the full funding of all reserve accounts
- Your organization’s ability to make up the difference between margins if circumstances should require it
- Base funding requirements, such as your annual operations budget, etc.
- The organizational approach to risk and risk management
It is crucial that any new reserve policy is well planned, and well documented among all critical stakeholders (i.e. management, your board, any necessary employees, grant makers, etc.) as well.
For more information on building a new reserve policy, re-read our earlier article, “The Importance of Operating Reserves,” here.