Operating Reserves
As a general rule of thumb, nonprofits should set aside at least 3-6 months of operating costs and keep the funds in reserve. Ideally, nonprofits should have up to 2 years’ worth of operating expenses in the bank. For many nonprofits, that’s just not practical. Nevertheless, it’s a goal that’s worth striving for.
When putting resources aside, don’t forget that your funds are meant to make an impact. In order to avoid relying on a bank loan for your nonprofit and ensure that your organization can continue to function smoothly despite problems or emergency situations, the best practice is to have 6 months of operating costs set aside. These operating costs include utilities, internet, and of course, salaries.
Harvard University, at one point, had $34 billion in reserves banked away. Under state and federal tax laws, however, as long as a nonprofit corporation is organized and operated for a recognized nonprofit purpose and has secured the proper tax exemptions, it can take in more money than it spends to conduct its activities.
If there is money left over at the end of a year, it can be set-aside as a reserve to cover expenses in the next year or beyond. To be in compliance with the Better Business Bureaus’ Standards for Charity Accountability, a non-profit cannot accrue a reserve totaling more than three times the annual budget.
Financial Tools and Accounts
Some organizations are flush during the holidays but not in the summer, while others receive a high percentage of donations at the end of the month but struggle during the middle. Instead of maintaining multiple accounts, your nonprofit should simplify by going down to one account that utilizes a variety of tools to help keep things running. Programs like QuickBooks help align your finances and track restricted and unrestricted funds.
Reinvestment and Profit
Nonprofits can make money and net profit by re-investing it. They can hold stock, bonds, own businesses, and similarly conduct business as corporations. Charging for services is fine, and assets of charities are only for use on exempt purposes, not for staff or board personal gains. If profit is associated with nonprofit’s purpose, it isn’t taxable "income."
Governance and Investments
Nonprofits can hold investments with the right governance. Individual directors have limited powers; their decisions are final, documented in resolutions. A nonprofit organization engages in public and private activities without pursuing profit.
Generating Revenue
Nonprofits make money through donations from individuals, companies, and by creating quality enterprises that appeal to both donors and the target population. By having different revenue streams and applying strategies to maximize impact while earning profit, such as launching a public café.