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What is a cash reserve? And can nonprofits even save money?
Let’s talk about cash reserves, also known as an operating reserve. But let’s be real. It’s your emergency wig glue. This is the money you set aside for when things go sideways.
A funder disappears or a venue floods, an artist you hired gets sick, but still needs to be paid. That’s what a cash reserve is for. It’s a difference between panic and pivot.
So how much do you need? Most organizations aim for a few months’ worth of expenses, but don’t get stuck on the number. Even saving a little bit from each grant or gig slowly builds up a cushion over time.
And here’s what we need to say louder. Nonprofits can have savings. Net-zero budgeting doesn’t mean spending every last dollar. Having a reserve isn’t bad planning, it’s smart planning.
A reserve is separate from your checking account and your gig’s budget. It’s your “break glass in case of emergency” fund. So yes, save that money. It doesn’t have to be a huge matter and your future self will thank you.
What is a Cash Reserve?
A “cash reserve” is your organization’s savings. That means money you build up in case your regular, ongoing income (revenue) falls short. You may also hear it called an “operating reserve”. Think of the word “reserve” here not like making a reservation at a restaurant, but like a reservoir of water.
A common goal is to have three to six months’ worth of expenses as a cash reserve. Some organizations aim for six-to-twelve months’ worth.
Your cash reserve would show up on your balance sheet under “unrestricted net assets” (see more on assets, liabilities, and net assets).
Where do I get a Cash Reserve?
Most organizations build up a cash reserve little by little. Since your cash reserve is unrestricted funds, you build it up from sources of unrestricted income. Earned income (e.g., ticket sales, artist fees, merch sales, workshop tuition) are all unrestricted. Donations in most cases are unrestricted. Occasionally, a foundation funder will provide a special grant specifically for the purpose of building a cash reserve, but this is extremely rare.
Operating reserves are unrestricted cash. So if you have a project grant that you haven’t used yet, don’t count that as part of your operating reserve! (More on restricted vs unrestricted funds)
In a for-profit, if you earn more than you spend in a given time period, that’s your profit. Typically, that profit is paid out to the owners or shareholders of the business.
A common misconception is that a non-profit isn’t allowed to have any profits, and has to spend every penny it brings in. That isn’t true!
A non-profit just isn’t allowed to distribute its profits among its stakeholders the way a for-profit business does. Instead, any unspent unrestricted income is kept to be spent on future expenses of the organization. The unspent unrestricted income you accumulate year over year is called your unrestricted net assets in the nonprofit context. It represents what the organization has available to spend on mission-aligned expenses even if no new revenue comes in.
In an arts context, if you and your comrades are freelancers and you put on a show, it’s a common practice to go through the cash at the end of the night, make sure all the expenses get paid out, and then split up the remaining amount among the performers/organizers. That is fine. BUT! If you’re a nonprofit organization, sharing out profits like that is exactly what you cannot do.
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