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Financial reserves are an organisation's savings. They are extremely useful, helping to strengthen an NGO’s sustainability.
They help an NGO to pay for activities that donors will not fund, or handle unplanned events (eg responding to new needs, or paying for legal costs or sickness cover).
General reserves have to be built up from unrestricted income. (This is because any surplus on a restricted project is tied to the same restrictions as the original project: it cannot be used to cover other costs.)
"Not-for-profit" does not mean that NGOs are not allowed to make a surplus. Every NGO should plan to build up reserves as part of its financing strategy.
What level of reserves?
It is often useful to set a target level of reserves to cover specific costs, such as:
- The cost of keeping the organisation running for 2 or 3 months,
- The cost of closing the organisation down (including closing down activities, paying off staff, terminating leases etc)
Generally, many NGOs plan to hold enough reserves to pay for around 3 months' expenditure. The board should decide what policy to follow, after considering the specific goals, risks and opportunities that your NGO faces.
It is normally illegal to have negative general reserves: it can mean that you are paying for general costs out of restricted funds. If you find yourself in this position, then you must give it attention straight away – maybe by getting professional advice.
How can you generate reserves?
There are four ways that an NGO can build up reserves from unrestricted income:
- Maximise unrestricted income - eg by charging fees for services, or by fundraising for the whole organisation, rather than for specific projects.
- Make the best possible use of restricted funds to free up unrestricted funds - eg by applying them to 'difficult-to-fund' budget items and retaining as much surplus as donors allow.
- Maximise project income - eg by making sure that projects are fully costed, including a contribution to core costs.
- Minimise expenditure – eg by promoting a culture of minimising costs, or negotiating hard for discounts from suppliers.
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