Getting Real About Reserves. Kate Barr, Nonprofits Assistance Fund Gloria Perez and Lauri Roberts, The Jeremiah Program

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1 Getting Real About Reserves Kate Barr, Nonprofits Assistance Fund Gloria Perez and Lauri Roberts, The Jeremiah Program

2 Who We Are Nonprofits Assistance Fund s mission is to build financially healthy nonprofits that foster community vitality. Our financial experts help nonprofits strengthen their capacity to address unexpected events, finance new opportunities, and realize strategic goals. We fulfill our mission by helping you thrive. Find out more at

3 What is Capitalization? Capital

4 The Role of Capital To operate the enterprise To manage normal cash flow cycles To protect the enterprise in case of unusual external problems To purchase & maintain productive assets To respond to long term changes in external forces in the market and community To provide for permanent obligations

5 Operating Revenue To operate the enterprise Funds used by nonprofit to pay for regular costs of delivering programs and operating the organization Reflected in the annual operating budget Operating income Operating expenses

6 Working Capital To manage the normal cash cycle for the organization Reimbursement based contracts Third party payments Lumpy grant payments Seasonal fees or fundraising $40,000 $30,000 $20,000 $10,000 Cash $0 ($10,000) Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun ($20,000) ($30,000) Month

7 Operating Reserves To protect the enterprise in case of unexpected, often external, problems Sudden loss of previously reliable income source Unexpected delays in timing of grants or receivables Unusual decrease in event/fee/ticket income Unplanned expenses

8 Building Reserves To maintain productive assets Cash reserves for repair & replacement for predictable & unexpected maintenance of the asset Often funded through depreciation

9 Risk/Opportunity Capital To respond to long term changes in market/community Strategic investment for the organization s future Program redesign or new approach Test market new development or marketing strategies Invest in organizational capacity that will result in new more stable business model Funds used for limited duration costs Will not require continuous subsidy

10 Endowment To provide for permanent obligations Permanently restricted gifts to maintain commitments Board designated quasi-endowment funds Invested for long term preservation & appreciation Endowment draw on income & appreciated value used for operating budget or designated purpose

11 What Capitalization Do You Need? All Operating Revenue Working Capital Most Basic Fixed Assets Operating reserves Risk/Opportunity Reserves Some Building & building reserves Endowments

12 What s the Right Amount? To operate the enterprise OPERATING REVENUE Reliable income & realistic annual budget To manage normal cash flow cycles WORKING CAPITAL/CASH FLOW FUND Project cash flow & anticipate the cycle

13 What s the Right Amount? To protect the enterprise in case of unexpected external problems OPERATING RESERVES Mission and risk assessments What expenses would be maintained Cost of exiting a program or major expense Be cautious about best practices standards

14 What s the Right Amount? To protect the enterprise in case of unexpected external problems BUILDING RESERVES Fixed asset assessment & maintenance plan Analysis of annual budget funds available System Replacement Plans Asset requirements for strategic plan

15 What s the Right Amount? To respond to long term external changes OPPORTUNITY/RISK/CHANGE CAPITAL What kinds of opportunities & changes? Tolerance for risk and testing ideas Adapting the business model

16 Sources of Capitalization Working Capital Operating reserves Surplus Surplus Line of credit One-time funds

17 Sources of Capitalization Building reserves Capital campaign Funding Depreciation Risk reserves Surplus Non-operating fundraising

18 Using Reserves When is it the right time to use accumulated capital? To protect the enterprise in case of unusual external problems To purchase & maintain productive assets To respond to long term changes in external forces in the market and community Communicating reserves use

19 Considerations for using reserves Operating reserves Risk reserves Risk assessment Business planning Amount, duration & replenishing Assumptions for results, duration & benchmarks

20 Reserves Policies Purpose of the reserve fund Definition and intended use Amount: target goal, minimum, or other benchmark Authorization and guidelines for use of fund Reporting and monitoring Guideline or restriction for investment of fund Article and example policies on Nonprofits Assistance Fund web site Resources section

21 Jeremiah Program Jeremiah Program is a nationally recognized nonprofit organization whose proven, holistic approach transforms families from poverty to prosperity two generations at a time. Life Skills & Empowerment training Safe & Affordable Housing Quality Early Childhood Education Support for Career-Track Education

22 Jeremiah Program Reserves Seasonal Cash Reserves Operating Reserves Capital Reserves Board designated endowment New community start-up General Expansion Reserves

23 Jeremiah Program Equity Reserves (000s) - Rounded Board Designated - Seasonal Cash Reserves $750 Board Designated - MSP Operating Reserves $900 Board Designated - MSP Capital Reserves $400 Board Designated - Expansion Reserves $500 MSP Endowment - Board Designated $2,700 MSP Endowment - Permanently Restricted $1,000 MSP Endowment - Restricted Trust $400 Expansion Communities - Restricted Purpose $1,500 Total Reserves $8,150

24 Reserves Planning & Strategy Strategic direction Reserves philosophy & purpose Board & leadership approach Tactics to build reserves Reserve policies & management Investment of reserves

25 What Capitalization Do You Need? All Operating Revenue Working Capital Most Basic Fixed Assets Operating reserves Risk/Opportunity Reserves Some Building & building reserves Endowments

26 Questions?

27 Thank You! Kate Barr, Executive Director Gloria Perez, President & CEO Lauri Roberts, Trustee