Nonprofit organizations need to maintain adequate reserves to safeguard their financial stability, according to a new paper by Grant Thornton.

Such reserves can provide nonprofits with a financial cushion to deal with operating deficits that may arise from unexpected events, economic uncertainties or lean funding periods. However, maintaining excessive reserves can also be a problem, as a number of organizations have been criticized for retaining excessive reserves.

Grant Thornton LLP’s not-for-profit practice has created a white paper, “Maintaining Sufficient Reserves to Protect Your Not-for-Profit Organization,” offering guidance to nonprofit organizations that wrestle with the issue of what level of reserves they should maintain within their net asset balances.

“The importance of maintaining adequate reserves cannot be overstated,” said Frank Kurre, managing partner of Grant Thornton’s not-for-profit practice and author of the paper. “With so many constituencies relying on the work of not-for-profit organizations, it would be fiscally irresponsible not to accumulate and maintain an adequate level of reserves. The recent protracted recession further demonstrates the importance of maintaining sufficient reserves to survive and sustain operations through turbulent times.”

The white paper examines some key questions that nonprofits may have about their reserve levels, such as whether quasi-endowment funds are a good idea, and what factors need to be considered when determining reserve levels. The paper also discusses what not-for-profits need to do to establish a formal reserve policy. In addition, it offers an appendix on calculating a reserve that is “right for your organization.” Some of the areas of consideration and how they affect reserves include the organization’s mission, long-term plans, investment in physical plant, and funding sources, including fundraising activities.

To download a copy of the white paper, visit www.grantthornton.com/nfpreserves.

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