No donor wants to fund a nonprofit that is going out of business. A strong financial position indicates to donors and foundations that your organization is healthy and forward-thinking.
So, why don't more nonprofits create a reserve?
1. They believe their donors want 100% of their donations to go to work right away.
This is not realistic and it's a recipe that will drive your organization into the ground, thus making less impact.
2. The board may not be business-minded and so they make financial decisions based on the impact that can be made today VS over the longterm.
If the organization is not financially stable, especially during hard times (ie. a global pandemic) their longterm impact will be put at risk.
3. Too many decisions are being made by passion instead of sound business logic.
It's hard for an organization to save money when they know they can put it to work right away, but if you start thinking about the long game, your capacity for impact can be 10x.
Create a reserve that gives you at least six months of runway. I promise this will make you a much better fundraising organization.
Sherry Quam Taylor dives into this in much more detail when she joins me on the Nonstop Nonprofit podcast. Don't have time for the whole episode? Check out the video snippet below.
And this is something that a lot of nonprofits don't think about. But having that reserve is actually advantageous, especially when raising with foundations. No one wants to fund an organization going out of business in three months. And when a foundation analyzes the finances and sees oh, this organization is healthy, it has reserves, it knows how to fundraise. It's going to make you a much more attractive organization to raise bigger dollars from foundations. And so I think that's another sort of strength of the reserve is for institutional giving. It's not frowned upon. It's actually it's an advantage for you.