Operating reserves
Operating reserves are the unrestricted funds a nonprofit can tap to keep programs running when revenue dips — commonly measured in months of operating expenses.
Watchdogs generally consider three to six months of expenses a healthy cushion. Under one month is fragile: a single lost grant can force layoffs or program cuts.
More isn't always better. Reserves far beyond operating needs — years of budget sitting idle — draw criticism that donated money isn't being put to work, which is why CharityIndex caps the reserves score once holdings pass roughly five years of spending.
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Related terms
- Net assets — Net assets are what a nonprofit owns minus what it owes — its accumulated financial cushion, the nonprofit equivalent of equity.
- Operating margin — A nonprofit's operating margin is revenue minus expenses, expressed as a share of revenue — positive means a surplus, negative means the year ran at a deficit.
- Endowment — An endowment is a pool of donated funds a nonprofit invests long-term, spending only the investment income while preserving the principal.
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