Reserve Funds

Dear Kim:

Our Board of Directors is trying to decide how much of a reserve fund we should have. We have done fairly well with fundraising and, so far, are growing even in this economic climate, and have put about two months of money in savings over the past six months.  However instead of being happy about that, the board is panicked that at any moment our growth will stop and we will plummet into bankruptcy.  One board member has found an article that says the “best practice” is to have a six-month reserve fund.  What do you think?

Signed me: A Grasshopper Working for an Ant Colony

Dear Grasshopper:

I admit that I am tired of hearing about “best practice.”  Obviously I think organizations should learn from others about what works and what works best, but now everything is measured against “best practice.” One can hardly come in the door without running into best practice—should one go immediately to one’s office, or should one say hello to the other staff?   What is the “best practice” number of bathroom breaks?  Not everything can be codified into “best practice” including how much money to have in reserve.

Reserve funds should be like any savings:  they give you financial security so you can imagine and then do things that you can’t when you are constantly worrying about money.  So the question is not whether you should have six months or three months or two weeks of money in the bank, but what amount of money will allow your organization to really pursue your mission?

Ask the board members to imagine having six months of money in the bank.  How do they feel?  What would they do differently than they are doing now?  If they wouldn’t do anything differently, then having money isn’t going to solve the problem. Ask if there are other ways they could feel secure in the organization’s ability to cope with this economy.  How about a growing number of donors?  Or high staff morale and low turnover?  You need to get to the bottom of their anxiety, and only then can you make a rational decision about how much money to have in reserve.  Acting rationally is always a “best practice.”

Good luck.

~Kim Klein