How much revenue should a nonprofit carry over at year end?

December 9, 2014 8:29 AM

I do development for a nonprofit whose budget is roughly $1 million. Last year, I raised about a quarter million more than we projected and I just saw that almost the full quarter million was unspent at the end of the year. Is it normal for a nonprofit to carry over this much as a hedge against fundraising uncertainties?

Early last year, we had our own "fiscal cliff" where all staff were asked to take reduced pay and hours, and some of our contractors were cut loose altogether. When we brought in the substantial unprojected income, staff salaries were restored but the contractors were not.

Recently our accountant generated our "projected vs. actual" budget for last fiscal year and I saw that the extra quarter million remained unspent at the end of the year. Something about that just seems unusual to me; plus, I would think it would look bad to funders to see that all that cash remained unspent.

Is it normal for a nonprofit to carry over that much from year to year, to guard against future "fiscal cliffs"?

posted by vegsister to Work & Money (6 answers total)

Perfectly acceptable. But you should look at setting up a formal process for dealing with such surpluses in the future, both to avoid the issue with funders that you mention and to prevent hijinks.
posted by Etrigan at 8:38 AM on December 9, 2014 [3 favorites]

I think the most responsible thing to do with an unbudgeted surplus in one year is to follow the regular budgeting process, and budget how you're going to use that money in the following year. Not to make a quick decision about how to spend it before the year is out. It's not grant money that will disappear if it isn't used in that year. Funders don't want donations spent quickly. They want donations spent wisely.

I'm not clear from your question whether a decision about how to spend this surplus hasn't been made yet, or whether it has been decided that the surplus is going into a sort-of savings account to act as an emergency fund.

If it is going to be treated as a reserve, especially if there isn't currently a reserve, its size does not sound out of line to me. Small nonprofits I've been involved with have had a reserve of 1/4 to 1/3 of their annual budget. One that I know of tended to receive lots of donations in the holiday season, but struggled with a dry spell every summer. If they didn't have enough put away in January to carry them through June, July, and August, there were going to be problems.
posted by Bentobox Humperdinck at 8:48 AM on December 9, 2014 [1 favorite]

The standard recommendation is for reserves of about 25 percent. The actual ideal will depend on factors including the stability of funding. For example, a membership organization will have a much more dependable income stream than a place that depends on a few large grants. Given that you were close to broke last year, that doesn't seem unreasonable. But as others said, this is a decision that should be made thoughtfully, and by all responsible parties (management and/or board), not just the accountant.
posted by Mr.Know-it-some at 8:57 AM on December 9, 2014 [1 favorite]

The two nonprofits I am involved with both keep fairly large reserves (in relation to their expenditures). For different reasons.

Big picture, depending on the type of program / activities, it's often not easy to turn organizations on a dime. And even for things that scale, it might not be a good idea to try to turn on a dime.

I would think that requests like, "Hey, umm, yeah, we need you to spend an extra $250k before the end of this fiscal year," aren't likely to lead to well-thought-out and prudent spending, even with programs that scale fairly decently.

And as far as restoring contractors goes, I'm not sure that's something that can or should turn on a dime, either. It's probably a good opportunity for leadership (both management and Board-level) to figure out how those expenditures fit in with larger goals. From a Board member perspective, if I were seeing those numbers I'd wonder if the uptick is sustainable, or a product of large one-off donations that the organization shouldn't anticipate being repeated in future years.

Incidentally, OP, in your question you took ownership for bringing in a good chunk of change. So I would certainly think it's within your rights (and potentially necessary for your job) to ask your management about the spending plan and budgeting process. Because the donors might ask you, right? Understanding whether the organization's fiscal house in order is important to some donors, and from the employee side, I'd think it would certainly help instill a sense of ownership and purpose in staff.
posted by QuantumMeruit at 9:24 AM on December 9, 2014

I worked for a nonprofit that previously didn't have reserves. They started building them with the last CEO because he wanted a financial cushion. Glad we had that because we were totally knocked on our asses after a natural disaster, and the reserves were the only way we could get back on our feet.
posted by radioamy at 4:06 PM on December 9, 2014

Do you have a finance committee or chair of finance on your board? Setting policy for this kind of eventuality is what they're supposed to do. I agree reserve is fine, but is there an endowment? NB, Finance is not my specialty, I'm conversant but not intimate with the protocols.
posted by Miko at 6:16 PM on December 9, 2014