More is More: The Case for Nonprofit Reserves
By Lindsey Bodner
“Let them gather the grain … and keep it. Thus the food will remain as a reserve for the land for the seven years of famine which will be in the land of Egypt, so that the land will not be destroyed by the famine.” – Yosef in Parashat Miketz, Bereshit 41:36-7
One thing we have learned from the COVID-19 pandemic is that more is more: Individuals with vacation homes and plenty of toilet paper usually fare better than those without, but this year the contrasts were starker than they have ever been in my lifetime. In the personal finance world, a 3-6 month emergency fund no longer feels like the gold standard; a year or more seems more prudent now. In business too, while both lockdowns and difficulty finding workable models have hit small and new businesses particularly hard, it is astonishing that so many companies with gargantuan profits were so close to the margins that they went bankrupt in the earliest weeks of the pandemic.
In the context of nonprofits, we can learn many lessons from COVID-19, including being bullish about preparation. I am by no means the first person to advocate for healthier nonprofit reserve accounts, but until now, there has been limited impetus to change the practice of raising all or most of the budget every year. In the nonprofit sector especially, there tends to be a bias against the immensely rational business decision to build reserve funds. Some erroneously assume based on the word “nonprofit” that nonprofits should be operating at a loss, or that it is unlawful for a nonprofit to carry over funds from year to year. This is simply incorrect; nonprofits should operate like well-run businesses, but instead of giving profit to the shareholders or employees, the funds must be reinvested into the nonprofit to further its mission.
Surpluses can be used for unexpectedly low fundraising seasons, occasional cashflow, or disasters, like pandemics. A surplus should never be an excuse to skimp on innovation or taking calculated risks, and the hope is that for the next pandemic (yep, I said it), a well-run nonprofit would be able to use its surplus to pivot quickly and adapt to the exigencies of the situation not merely to coast till the surplus is spent down.
As funders, we know that many of our grantees are struggling to stay afloat, so any advice we give them should be weighed carefully, but we should be encouraging nonprofit boards and other leaders to prioritize building their surplus now or as soon as reasonably possible.
COVID-19 has encouraged grantmakers to think creatively and compassionately. Many are making emergency grants, converting restricted donations to general operating support, giving more latitude to CEOs on decision-making, and the list goes on. This same mindset should come into play with surplus-building. Funders can encourage nonprofits to build reserves in direct conversations and by helping to create the conditions that enable them to prepare for the future. These conditions include making multi-year grants when appropriate, making grants that fill in budget gaps, hiring excellent CFOs and financial planners with the goal of creating reserves, and funding identified needs rather than creating new programs. In our contracts, we should take out clauses that insist on returning unused funds and instead require communication and continued reporting (perhaps in simplified formats).
Having a surplus should never take the place of fundraising or encourage complacency. Risk-taking and innovation are key to the ability of nonprofits to survive and thrive in a changing world, but chasing opportunities should go hand in hand with financial responsibility. Some grantmakers might look askance at a surplus, wondering, “if they have that much money, why do they need my donation?” Whether development professionals preempt this thinking by addressing it outright or it comes up behind closed doors in funder conversations, we must dig deeper and get to what is behind the sentiment. If it is about recognition, there are probably ways to satisfy everyone. If it belies a desire to “save” failing organizations or it stems from the belief that nonprofits should operate on a shoestring, that is wrongheaded but also worth discovering. Perhaps it is an opportunity for education, or perhaps it is not the right funding relationship.
If building a reserve fund might have been a tough sell or a low priority before 2020, it shouldn’t be going forward. We can all see how fragile our systems and institutions are and how quickly nonprofits inside and outside the Jewish community can go from flourishing to barely surviving or shuttering. Of course we hope there won’t be a “next time,” but the adage “hope is not a strategy” rings true here. Like Yosef in our parasha, we should be moving to the prevention phase of the cycle of emergency management, considering what we can do to fare better in the next emergency: one clear step we can take is building financial fortitude. In future disasters, loans may be slower and smaller, or they may not come at all; our nonprofits will be healthier and more durable if we are able to plan ahead. Ensuring our grantees are able to thoughtfully build a surplus and that a funding culture develops around reserves as best practice will help fuel a better and more resilient nonprofit sector.
Lindsey Bodner the executive director of the Naomi Prawer Kadar Foundation.