Risk and Your Reserve

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

We’ve all been involved in planning a charity event of some kind, a gala, a barbecue, a 5k.  When I’m involved in planning an event, I stress about what might go wrong, and I go into checklist mode. One time, I had a checklist that could almost send astronauts to the moon and return them safely to earth. I had someone in charge of each key area to handle things if something went wrong–because you know something will go wrong.  You know some element of the event will not go as planned, you just don’t know which element it will be.  In the end, the planning was always worth the effort.  The team was prepared to react as things happened, and adapt to change.

This idea is where your reserve goal discussion should start.  In planning for your nonprofit’s financial sustainability, you know you should have a reserve, but you may not be sure how much it should be.  The answer to that question lies in your risk assessment process.  A reserve fund gives you the resources to react to change and the reaction time to adapt.  It’s an important component of your financial survival.

You may lose a key leader, you may lose a grant, you may get sued. These are the things that keep you up at night.  But you should do more than just worry.  These “what if’s” should flow into your risk assessment process.  During your risk assessment, you imagine potential risk events, assess how likely they might be, picture their effect, and design ways to address them.  

Some risk events, like the risk of a lawsuit or a data-breach, can be mitigated by insurance.  Other risk events are not that easy to tame.  There’s no insurance for losing a major grant or a key corporate partner.  To tame these risks you may need some money set aside in a reserve.  To decide how much, you’ll need to develop an action plan.  What steps would you take?  How much money would it cost?  Through this kind of analysis, you’ll begin to develop a reserve goal in an amount to get you through adversity.

After all, it’s not the strongest of the species that survives, nor the most intelligent, but the one that is best able to adapt to change. *

What can we learn?

Consider your risks.  Identify your most severe potential risk events and consider what you need to be prepared.  We have a helpful session on this called Risk Assessment and Your Reserve—focus on financial sustainability, in our new, continued financial leadership seminar, Raising the Bar—Preparing for Higher Expectations.

See where you stand. Evaluate your working capital, or your current assets in excess of your current liabilities.  Evaluate your reaction time, or how many days your working capital would last in case of emergency by comparing your working capital to your expenses per day.  There’s a helpful session in our financial leadership training seminar for emerging nonprofit professionals on Financial Statement Concepts.

Review your cash management policy.  New GAAP for nonprofit financial statements will require more disclosure about your liquid assets and your liquidity policy.  Draft those notes now to see if you like how they look.  Learn more about the new GAAP for nonprofits at 501(c)(fit!) financial leadership training for emerging nonprofit professionals or the In-depth seminar on the new financial reporting GAAP for nonprofit controllers, CFOs and other accounting professionals.

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*Many attribute these words to Charles Darwin, but it’s really a paraphrase from 1963 by Leon C. Megginson, a university business professor.

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