Should You Embark on Cash Reserve and Capacity Campaigns?

Cash reserve and capacity campaigns are in dire need throughout our sector. If you answer yes to one or more of these questions, this article is for you.

Are you continuously juggling cash flow?
Is your agency’s credit line at its limit?
Is your client base growing faster than your donor support?
Have funders asked you for stronger program outcomes, but your quality assurance (Q/A) department is nonexistent or understaffed?
Is a new program needed, but you lack planning funds to test it?
Is your IT capability not up to 21st century demands?

If your answer is YES to any of the above, then consider undertaking a cash reserve and capacity campaign.

The Details

Operating reserves may be a part of your organization’s unrestricted cash or working capital. Every nonprofit needs to have sufficient cash flow coming in from various income sources and going out to pay expenses and other obligations when they are due. Some organizations create reserves by setting aside cash in addition to the regular bank fund balances for use when regular cash flow is disrupted.

Reserves are also different from restricted funds. Restricted funds are grants and contributions that have been received for specific programs or projects. These funds are “restricted” for use according to the grant agreement or the donor’s instructions. Sometimes this means that restricted funds sit idle in the bank for a while and the nonprofit cannot use those funds for another purpose.

Reserves, on the other hand, are “unrestricted” funds that can be used in any way that the nonprofit’s management and board choose.

Missed Opportunities

You probably have funded capacity and infrastructure costs from your general fund. Is that right? If so, your infrastructure support has usually been under-funded causing missed opportunities to serve your clients and properly support, train and compensate your staff. You need not have that problem.

Reserves Equal to 3 Years

To resolve that issue, did you know that The U.S. Better Business Bureau allows you to have operating reserve funds up to three years of operating expenses? Yes, three years. So, if your organization’s annual budget is $8 million, you can have unrestricted reserves of $24 million. The larger the nonprofit, the closer one should aim to having a significant reserve.

To raise unrestricted support, as well as to provide additional funding to build infrastructure capacity, a cash reserve and capacity campaign, in the tradition of capital campaigns, is recommended. The campaign is time limited, lasting 36 to 60 months on average, and seeks special gifts, challenge gifts and major gifts from your most loyal funders and individual donors, as well as from new value-aligned donors that we identify through prospect research. These gifts are secured through personal meetings, presentations and funder special appeals.

The U.S. Better Business Bureau’s Wise Giving Alliance, which assesses whether national organizations follow its Standards for Charity Accountability, does state in those standards that charities should “avoid accumulating funds that could be used for current program activities.” However, to meet that organization’s standards, a nonprofit can’t have operating reserves totaling more than three years of current operating expenses.

Where to Begin

To begin a cash reserve campaign, start with a feasibility study, including an audit of your development and communications programs, and use those findings to develop a comprehensive plan for the campaign that is unique to your agency. Your cash reserve campaigns should include methods to develop new donor constituencies and/or a business plan for for-profit ventures if appropriate.

You will also need a cash reserve policy just to fit your agency so that the board can authorize how the cash reserves should be used.

A state of the art case for support that drives home the urgency of your organizational mission will also be needed. The case for support will show your prospective donors how increasing your capacity and improving infrastructure can make your programs stronger, more reliable and flexible to changing needs.

I saved the best for last: The costs for the campaign should be included in the campaign fundraising goal, so that you fundraising costs are paid for in the end. Nice, right?

Of note, a properly conducted campaign should boost your annual fund efforts, not reduce them.

At the end of a successful campaign, your agency will have a new or expanded cash reserve fund, the funds to increase its quality assurance program, I/T and other support functions, and especially a stronger development program.

Are your cash reserves at the level they should be? Please share what your needs are with me, either on our blog or email me privately. I look forward to hearing from you.