SURGES & CLIFFS

There are a number of reasons why organizations experience surges in funding. These can include heightened public attention, successful marketing campaigns, or a shift in attention due to recent political, cultural, or social movements. When these surges occur, it's crucial for organizations to have strategies in place to capitalize on the influx of resources. This can involve expanding their operational capabilities, investing in long-term projects that were previously underfunded, or saving for future drops in funding. However, managing a surge effectively also requires careful attention to the organization's mission and values, ensuring that rapid growth does not dilute its core purpose or alienate its foundational supporters.

An example of a surge is the massive increase in funding to Black-led organizations in the wake of the 2020 movement for Black lives and national reckoning with the murder of George Floyd. This funding surge greatly increased the amount of funding  and resources that Black led nonprofits and movement groups were traditionally starved of. However, the funding dried up as quickly as it came. Despite the long term commitments made by the corporate and philanthropic sectors, funding reduced and in many cases because of cultural backlash is less today than it was pre-2020. 

This sharp decline in funding is an example of a cliff. Cliffs present significant challenges that can threaten an organization's stability and long-term viability. Cliffs can be triggered by various events, such as a scandal, a shift in public interest, a drop in funding after a major success, or the loss of a major donor. In these situations, it is essential for organizations to have contingency plans that can be quickly implemented. This might include reducing operational costs, focusing on core activities, and seeking alternative funding sources, such as independent revenue generation. 

An organization's ability to be sustainable boils down to its ability to navigate both surges and cliffs. Adaptability and resilience is the name of the game when it comes to sustainability. Building a diverse funding base, cultivating strong relationships with donors and the community, and continuously evaluating and adjusting strategies are key to success. Organizations that can quickly pivot in response to changing circumstances while maintaining a clear focus on their long-term goals are more likely to thrive despite the inherent unpredictability of fundraising. By understanding and preparing for the dynamics of surges and cliffs, organizations will be able to make lasting impacts in their work and survive long enough to see the wins they are working towards.

And don't forget about miscellaneous expenses such as:

• Hiring of temporary staff or consultants (e.g, grant writers, event planners)
• Bank fees for handling donations
• Legal or accounting fees
• Contingency funds for unforseen expenses

Handling a sudden loss of funding can be challenging for nonprofits, requiring swift and strategic actions to mitigate the impact. Here’s a checklist to guide nonprofits through this difficult period:

Introduction

Establishing a reserve fund is not merely about having a financial cushion; it’s about securing the organization’s mission and ensuring its programs can continue even in the face of unforeseen financial pressures. When pitching the necessity of a reserve fund to the board, it's crucial to highlight the potential risks of operating without such a safety net—ranging from the inability to respond to emergency needs, to the threat of discontinuing services due to lack of funds. The pitch should also show how a reserve fund can enable the organization to potentially expand at critical times that will require some upfront seed money.

The management of the reserve fund requires careful planning and oversight. Setting clear guidelines on the fund's size should be a function of the organization's operating budget, risk exposure, and future financial goals and needs to be decided upon by the executive leadership and board in tandem. Policies must be established regarding the conditions under which the reserve can be tapped into, the process for replenishing it, and how its investments are to be handled to ensure both liquidity and yield. Regular reporting to the board on the status of the reserve fund, its performance, and any risks should be part of the governance practices. This not only promotes transparency but also reinforces a culture of informed decision-making, ensuring that the reserve fund remains a robust pillar of the organization’s financial health and strategic planning.

When experiencing a surge, it is important to use this as a catalyst for your reserve fund, if you have not started one yet. While it’s tempting to use all this new funding to expand programming, or hire more people, it is important to be able to measure your ability to sustain a new budget. If a surge has your organization raising more money than you anticipated needing this fiscal year, add one year expenses to any new line item. For instance, if you are planning on hiring a new person at $75,000, only hire that person after you’ve raised $150,000 with the other $75,000 going into the fund to help subsidize any lost funding in the future.Ultimately you would like to have at least 6 months of operating funds in the reserve fund.

While experiencing a cliff, have policies and expenditure formats already set up so you can move as quickly as possible. One great way to do this is to have a certain amount of the reserve fund available for release at the discretion of the Executive Director, with further  depletion going through a board approved process. For instance, an organization may allow the Executive Director the discretion of spending up to a quarter's operating expenses from the reserve to allow the organization to respond to large unexpected costs.

Why You Need a Reserve

Nonprofits are susceptible to financial uncertainties and shifts that can happen without little warning. Building a reserve fund is a critical strategy for organizations, acting as a financial buffer that safeguards their mission during turbulent times. The unpredictable nature and uncontrollable shifts of individual and institutional donors can change significantly due to economic downturns, shifts in donor priorities, or global crises. A reserve fund ensures that nonprofits have the means to cover operating expenses and continue their vital services without compromise, even when income streams temporarily dry up.

With a financial cushion, organizations can afford to take calculated risks to expand their programs, explore new opportunities for service, and invest in essential infrastructure without the immediate pressure of fundraising to cover these costs. This strategic use of reserves can lead to more impactful outcomes, allowing you to reach more beneficiaries and strengthen your contributions to the community. It transforms the reserve from a mere emergency fund into an innovation fund – a tool for proactive organizational development.

In addition to providing financial stability and supporting growth, a reserve fund also improves credibility and attractiveness to donors. Savvy donors and grantmakers often look for signs of financial health and sustainability in the organizations they choose to support. A well-maintained reserve fund signals responsible financial management, foresight, and a commitment to the organization’s long-term viability. This can make the nonprofit a more appealing investment, potentially leading to increased funding as donors feel more confident in the organization’s ability to manage resources wisely and sustain its impact over time and shows an ability to fund work beyond a grant.

A reserve fund plays a crucial role in strategic decision-making. Nonprofits face constant decisions about resource allocation, program development, and operational adjustments. Having a reserve fund provides a safety net that gives leaders the freedom to make decisions that are in the best interest of their mission, rather than being constrained by immediate financial pressures. It allows for a focus on what is best for the organization and its beneficiaries in the long term, promoting strategic thinking and innovation. In essence, a reserve fund is not just a financial tool but a critical component of a nonprofit's strategic framework, ensuring resilience, promoting growth, and enhancing decision-making capabilities.

A reserve fund is a critical component of a nonprofit's financial stability and long-term sustainability. It provides a safety net in times of unexpected financial challenges and helps in planning for future growth. The following templates include a sample resolution for board approval, a pitch to the board highlighting the necessity of a reserve fund, and a guide on the management of the reserve fund.

Guide to Managing the Reserve Fund: When and How to Contribute to the Reserve Fund

Funding Goal: Aim for at least 6 months of operational costs (or at minimum payroll and keep the lights on and compliant costs) as a baseline for your Reserve Fund.

Contribution Schedule: 

Aim to contribute to the Reserve Fund annually, based on the fiscal year-end surplus.

Funding Sources:
Identify specific sources for Reserve Fund contributions, such as a percentage of annual surpluses, proceeds from special fundraising events dedicated to the Reserve Fund, or direct donations.

Guidelines for Reserve Fund Usage:

Operational Continuity: 

Use the Reserve Fund to cover essential operating expenses during unforeseen financial shortfalls.

Strategic Investments: 

Allocate funds for opportunities that have the potential to significantly advance the organization's mission.

Withdrawal Process: 

Establish a formal process for withdrawing funds, including a detailed proposal, assessment of the impact on the Reserve Fund, and Board approval.

Monitoring and Reporting:

Regular Reviews: 

Conduct quarterly reviews of the Reserve Fund's performance and its alignment with the organization's financial strategy.

Transparency: 

Ensure transparency in reporting the status and use of the Reserve Fund to stakeholders through annual reports and board meetings.

Sample Resolution for Establishing a Reserve Fund

Title: Establishment of a Nonprofit Reserve Fund

Whereas, the [Nonprofit Organization Name] recognizes the importance of financial stability and sustainability in fulfilling its mission;

Whereas, unexpected financial challenges can significantly impact the organization's ability to operate effectively;

Whereas, a reserve fund is essential for ensuring the organization can continue to serve its community during times of financial uncertainty;

Be It Resolved That:

Establishment of the Reserve Fund:

The Board of Directors hereby approves the establishment of a Reserve Fund for the [Nonprofit Organization Name].

Purpose:

The Reserve Fund is intended to provide financial stability and sustainability by supporting operations during unforeseen financial difficulties and enabling strategic investments in the organization's future.

Funding and Investment:

The Reserve Fund shall be funded through [specify sources, e.g., surplus revenues, specific fundraising efforts, donations].

Investments shall be made in accordance with the organization's investment policy, prioritizing low-risk investments to preserve capital.

Withdrawal Conditions:

Withdrawals from the Reserve Fund shall only be made under conditions that threaten the organization's operational continuity or when significant opportunities arise that will advance the organization's mission. Up to 3 months operating costs from the reserve are available at the Executive Director’s discretion with a written request to the Board. All further withdrawals require Board approval.

Management and Reporting:

The Finance Committee shall oversee the management of the Reserve Fund, reporting to the Board of Directors quarterly on the fund's status and any recommendations for changes to funding or investment strategies.

Adopted this [Day] of [Month], [Year] by the Board of Directors of [Nonprofit Organization Name].

Sample Pitch to the Board: The Need for a Reserve Fund

Introduction:

Ladies and Gentlemen of the Board,

I wish to initiate an essential step towards securing our organization's future: the establishment of a Reserve Fund. In our journey to serve our community, we have faced numerous challenges. While we have managed thus far, the creation of a Reserve Fund will ensure our sustainability and ability to respond to unforeseen circumstances.

Why Reserves Are Needed:

Financial Stability: A Reserve Fund acts as a safety net, ensuring we can continue our operations during unexpected financial downturns without compromising our services.

[INCLUDE 2 EXAMPLES OF FISCAL DIFFICULTIES]

Strategic Opportunities: It allows us to seize strategic opportunities that align with our mission without the delay of external funding.

[INCLUDE 3 EXAMPLES OF NEW PROGRAMS OR EXPANDED PROGRAMS THAT REQUIRE ADDITIONAL FUNDING]

Donor Confidence: Demonstrating financial prudence through a Reserve Fund can increase donor confidence, knowing their contributions go to an organization that plans for the long term.

The Impact of Not Having a Reserve Fund:

Without a Reserve Fund, we risk being unprepared for economic downturns, facing potential program cuts, and losing the trust of our donors and community. It's not just about surviving tough times; it's about thriving and advancing our mission with confidence.

Conclusion:

I urge you to consider the establishment of a Reserve Fund as a cornerstone of our financial strategy. It's a step towards ensuring that [Nonprofit Organization Name] remains resilient, capable of facing challenges head-on, and continues to serve our community effectively.