Many nonprofits vulnerable to uncertainty due to low operating reserves

• Date: 01 August 2017
• Published date: 01 August 2017
• DOI: http://doi.org/10.1002/nba.30344

AUGUST 2017

5

NONPROFIT BUSINESS ADVISOR

© 2017 Wiley Periodicals, Inc., A Wiley Company • All rights reserved

DOI: 10.1002/nba

Financial Management

Many nonprots vulnerable to uncertainty

due to low operating reserves

New research from accounting rm BDO shows that

the nation’s nonprots are still struggling with liquid-

ity issues that could hamper their ability to weather a

downturn in donations and grants. The rm’s recent

study Nonprot Standards found that nonprots have

liquid unrestricted net assets amounting to an average

of 8.7 months of operating reserves. However, some 40

percent maintain between one month and less than six

months of reserves, and almost a quarter of health and

human services organizations surveyed for the report

don’t maintain any operating reserves at all.

According to Laurie De Armond, national co-

leader of BDO’s Nonprot & Education Practice, the

data show a charitable sector that is quite vulnerable

if a major economic downturn took place.

“Without adequate operating reserves, nonprots

can’t weather uncertainty in their funding streams or

other things that could threaten their programming,”

De Armond said.

Certainly, the last major recession caught a lot of

nonprots off guard, and many saw donations dwindle.

But now that charitable contributions are back near

record levels and the economy seems on track, other

changes in the political landscape still threaten non-

prot cash ows, she said.

Many organizations rely heavily on government

grants, for example, and the current administration

seems intent on cutting funding that previously had

seemed stable. Add to that governments cutting back

on their own social services programs, and nonprots

could be facing increases in demand for services, along

with cuts in government funding—even while the

broader economy is humming along and individual

donations are doing well.

Having sufcient reserves on hand to handle these

scenarios—doing more with fewer resources—is criti-

cal, she said.

Adequate cash reserves are also vital when it comes

to strategic planning, she said. When a charity goes

through the strategic planning process and identies

activities and changes needed to solidify and expand

the capabilities of the organization, they will need

to draw on operating reserves to put such plans into

motion.

“One of the biggest risks nonprots run in having

too little in operating reserves is not being able to invest

in themselves. They need to have a stable footing so

In its recent report on the nonprot sector, ac-

counting rm BDO found that more and more

donors are expecting charities to report increas-

ingly complex nancial data showing impact. Per

the report, some 55 percent of organizations said

that some portion of their funders have required

more information than was required in years past.

According to Laurie De Armond, BDO’s co-leader

for its National Nonprot & Education Practice,

today’s donors are growing more sophisticated in

evaluating charities’ effectiveness. They have a bet-

ter understanding of what nancial metrics mean

and how they relate to impact. They know that the

basic overhead ratios used in the past don’t tell the

whole story of what a charity does and the impact

it is having, she said.

And while nonprots are straining under the

increased reporting burden, devoting resources to

this creates a positive feedback loop that helps pay

for itself in the end.

“Many nonprots are struggling with this, and

often don’t have the human resources and stafng

needed to gather the information and report it out.

But it is very important data to gather,” she said. “It

is extremely powerful to be able to effectively dem-

onstrate the impact your organization is having.”

That helps attract more supporters and drive

more donations to your organization, she said. ■

More sophisticated donors seeking more nancial data

(See UNCERTAINTY on page 8)