United Way Worldwide mandates an annual membership certification, which requires organizations to confirm accountability and adherence to financial reporting standards.
One critical figure requested by United Way is the amount of operating reserves.
To calculate operating reserves, refer to your organization’s Statement of Financial Position and use the following equation:
Operating reserves = Undesignated Net Assets Without Donor Restrictions – Fixed Assets, net of Accumulated Depreciation.
While this may appear simple, there are several questions to consider when calculating Operating Reserves:
- What are undesignated net assets without donor restrictions?
- Why are fixed assets excluded from the operating reserves calculation?
- What level of operating reserves should be maintained?
Net Assets
Net assets represents the cumulative surpluses the nonprofit has retained since its establishment.
Net asset categories:
- Without donor restrictions
- With donor restrictions
The latter reflects the unused resources received from donors who have imposed a restriction on the use of those funds for a specified purpose or period. An organization cannot consider those resources as available for general operating use.
Net assets without donor restrictions consist of everything else. However, it is important to note that the categorization of these assets could involve certain complexities and circumstances.
- Board designated
- Undesignated
The organization’s Board may designate and set aside a portion of funds for a specified purpose or future use. These funds might not be deemed accessible for regular operational purposes. The remaining balance of net assets without donor restrictions, which have not been specifically allocated by the Board, is categorized as “undesignated” and can be utilized to support general operational needs.
Fixed Assets
Underlying assets that fall under “undesignated net assets without donor restrictions” are discretionary without limitation. However, only liquid assets are available to cover operating costs.
Liquid assets are cash and other assets that have a maturity of under one year; in other words, they will be converted into cash in the short-term.
Liquid Assets
- Cash
- Current accounts receivable
- Short-term marketable securities
Fixed assets include items that are illiquid in nature, such as real estate, furniture, and equipment. Because their value cannot be readily converted into cash, they should not be considered accessible for covering current operating expenses.
Operating Reserves
There is no one-size-fits-all operating reserves number, and the appropriate amount will vary based on the size and activities of each organization.
Though, there is a liquidity general rule:
- Minimum three months (25%) of annual operating expenses.
- Only quantifies the resources needed to cover current obligations but does not address the ongoing needs of the organization.
Therefore, the desired increase in operating reserves will vary for each organization, as there is no fixed amount that applies.
Recent events highlight the importance of adaptability in navigating economic downturns and shifts in funding sources and regulations.
Nonprofits must intentionally consider what resources they will need to meet the unknown.
Time Horizon
- Evaluate how long it could take to get back to business as usual (this could be six months, a year, or even longer).
- Build Operating Reserves to cover the projected operating costs for a time horizon that is both appropriate and realistic for your organization.
YPTC is here to help!
Managing operating reserves is complex, but YPTC provides valuable assistance through a range of resources and a skilled team of experienced staff members. To learn more about operating reserves, overhead, meaningful financial reports, and other financial issues that impact your United Way, visit www.yptc.com, or check out our United Way Specialization page: YPTC and United Way.
