Reserve funds consist of money which is available to a NGO for spending without restrictions. They are the most flexible type of funds.
You can distinguish four types of funds based on how these funds can be used by the NGO management (graphic 1).
Graphic 1: Types of funds available to NGOs
Reserve funds provide spending money in case of emergencies or special opportunities and allow covering expenses not funded by donors and grant makers.
They also serve as a buffer by giving the organization extra time to adjust to changed circumstances.
Unrestricted money in form of reserve funds also helps NGOs with cash-flow problems. They compensate for lower earned income and raised funds than originally planned.
Reserve funds will furthermore close cash deficits due to delays in donor and customer payments as well as unforeseen and unusual expenses.
Finally reserve funds can serve to pay for the expenses that will occur when the organization will be closed down.
Restricted funds are given for a specific purpose.
Designated funds are unrestricted money that has been set aside by the organization for a particular purpose (e.g. repairs).
Endowment fund can be either restricted or unrestricted money that is invested in order to earn income.
Deciding the level of reserve funds
Some online sources mention cash reserves of 2 - 3 months expenditure as the norm, others 3 – 6 months of expenditure.
These reserves would allow the NGO to continue offering their services without any interruption during this time, even if it did not have any income at all during this time.
You should answer the following questions before deciding about the level of reserve funds your organization will strive for.
- Are you required by law or by donors to hold reserves?
- How quickly can the organization respond to changing circumstances by raising additional funds or cutting expenditure?
- What are the consequences of cutting expenditure on your staff, customers and beneficiaries?
- What is the effect on beneficiaries if you stop providing a service
- How reliable are the sources of income?
- How predicable is the future level of expenditure?
- How much unrestricted money can be raised?
- At what level of reserve funds will donors be discouraged from providing further funding?
- Does the organization exist in order to help with short term, non-complex problems or has the service to be provided for a long term?
- Does it make sense to keep reserves (e.g. high inflation rate, low interest rate)?
- What are my commitments if the NGO closes down?
Building up reserve funds is a 5-step process (graphic 2).
Graphic 2: Building up reserve funds
Making building reserve funds a financial goal (step 1) will normally be done during strategic planning.
The planning process will also involve choosing strategies (step 2) that will allow the organization to achieve this strategic goal.
Basic strategies could be to
- Finding donors who will provide the unrestricted funds
- Building up a reserve by generating unrestricted funds yourself
It is important to communicate internally and externally (step 3) that you have decided to build up reserve funds and the reasons for doing so. This could be done by means of developing and publishing the official reserves policy of the organization.
The reserve policy is a written statement which should
- Provide reasons for keeping reserves.
- Justify the level of reserves needed.
- Explain how reserve funds will be established and how the target level will be maintained.
- Inform how often the policy will be reviewed.
The next step would be developing action plan which defines in detail all planned activities to achieve the strategic goal. These could be:
- Setting aside earned interest from endowment funds.
- Raising membership fees
- Raising funds for general purposes.
- Selling products and services for profit.
- Recovering some costs or full costs of services.
- Asking donors whether they will help building up reserve funds.
- Checking with donors whether some parts of unspent funds can be retained.
Finally the organization should develop its capacity in those areas that help to
- Acquire resources at lower prices
- Make better use of its financial, human and other resources.
Both will contribute to lower costs and possibly to surplus funds that the NGO can add to its reserve funds.
Sources / Guide to further reading (available online)
J.Cammack, Building Capacity through Financial Management, 2007, at: http://www.oxfam.org.uk/resources/downloads/buildfincap_book.pdf
- The Oxfam guide covers cash reserves as an important aspect of Financial Management (pages 78 – 82)
Mango, Building reserves, 2010, at: http://new.mango.org.uk/Guide/FM2HandbookBuildingReserves
- Notes prepared as supplement to a training course about Financial Management.
Charity Commission, Charities and Reserves, 2010, at: http://www.charity-commission.gov.uk/Publications/cc19.aspx
- A detailed document published by the regulator of registered charities in England and Wales