NPO reserve funds: Why they're crucial and how to build them

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In a nonprofit context, a reserve fund is a financial resource set aside to ensure the organisation’s long-term sustainability and stability. It is essentially a savings account for financial downturns, unexpected expenses, or strategic opportunities, and can avoid programme cuts and staff retrenchments.

Advantages of a reserve fund

A reserve fund is invaluable should there be a delay in receiving funding committed to an organisation. A reserve fund can also finance long-term investments, such as upgrading IT systems or renovating office space.

The security of a reserve fund also gives an NPO the leeway to be innovative and nimble. It is free to embark on research and development, engage in advocacy, or test out new programmes until grant support is secured. There is financial breathing room for important strategic decisions.

Finally, a reserve fund strengthens donor confidence. If an NPO has strong financial management plus a reserve fund, donors are more likely to view the organisation as a sustainable, trustworthy partner for long-term support.

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How do you build a reserve fund?

A reserve fund is typically built over several years through regularly allocating a portion of the organisation’s undesignated or unrestricted income to the fund, and ensuring its growth through prudent financial planning and investment.

Nonprofits increasingly generate their own funds through services, partnerships, or social enterprises, rather than relying solely on donations. At Inyathelo, for example, income generation is based on a social entrepreneurial model, blending traditional nonprofit reliance on donations and grants, with generating its own revenue through diverse income sources.

These include fees generated by training and consulting, and sales of publications, amongst other income-generating strategies.

Inyathelo also owns a multi-purpose hub and sector sustainability centre in Woodstock, Cape Town. It was made possible by funding from a private foundation, The Atlantic Philanthropies, and Inyathelo’s own resources. Inyathelo generates income by hiring out the hub’s conference and meeting facilities, office and hot-desking spaces, and parking bays.

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Growing the reserve fund

It is crucial to manage reserve funds with care, and a certified financial planner can provide tailored advice on growing a reserve fund in line with an organisation’s goals.

Many NPOs turn to consultants and organisations specialising in the financial needs of NPOs, who will develop investment strategies that align with the nonprofit’s mission.

Many nonprofits also wish to make ethical investment choices. Inyathelo’s Board resolved in December 2020 to divest from direct fossil fuel, alcohol and tobacco holdings. These securities were sold off during the year and fortunately no losses were incurred.

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FATF

Similarly, when establishing their reserve policies and governing funds, boards must consider Financial Action Task Force (FATF) recommendation guidelines, which aim to protect nonprofits against potential terrorist financing abuse. This ensures the integrity of their funds and prevents them from being used for illicit purposes. It also contributes to the broader fight against financial crime.

Finally, it is a misconception to assume that a nonprofit with a robust reserve fund no longer needs donor support. On the contrary, a healthy reserve is a sign of prudent financial management and long-term sustainability.

Nonprofits with strong reserves are better equipped to weather challenges, deliver consistent impact, and ensure that donations are used strategically. Donors and funders should see this as an opportunity to partner with an organisation that is both responsible and resilient, knowing their contributions will be well-managed and make a lasting difference.