A question nonprofit leaders constantly ask us is:
How much does our nonprofit need in emergency reserves?
This question now has been brought into greater focus in light of the coronavirus pandemic. But the answer isn’t straightforward. How much a nonprofit needs on hand for emergencies is dependent on its risk profile.
Risk profile is the organization’s ability and willingness to take chances that could lead to losses. For example, a nonprofit with a very low risk profile may be able to get away with three months of expenses on hand to pay for unplanned incidents. Alternatively, a nonprofit with a very high-risk profile may need as many as 12 months or more of expenses.
So how does a nonprofit assess its risk profile? Conduct this 5-point emergency reserve check to determine how much in funds your organization needs.
- Number of employees
The more employees an organization has on staff the larger the size of reserves to pay for unplanned staff emergencies.
If an organization owns and/or operates facilities to deliver its services, the more exposed it is to property-related incidents such as fire, electrical, security and safety to name a few.
The extent that technology plays in managing the organization determines how much cash you’ll need to pay for problems associated with cybersecurity, capacity, availability, or data, to name a few.
- Revenue Timing
You’ll need a healthy emergency reserve if you can’t easily predict how much revenue comes in month to month.
If a nonprofit requires a 1000-page manual to describe how it delivers its programs to customers, it will need more cash available to pay for errors and other operations mishaps.
What does this all mean? Nonprofit leadership should be reviewing these 5 risk areas at least once per year to understand the how much an organization would spend to resolve a mishap within a three-year time frame.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!