New Information for Establishing Operating Reserves*

By Lee Klumpp, CPA, BDO

Operating Reserves can be quite complex. The words “operating reserves” can mean many things to many different people, and the first thing that must be done is establishing the definition and the expectations of the stakeholders.

Dick Larkin, BDO Technical Director, has spent a significant amount of time over the past several years working on the Operating Reserve Issues with the Nonprofit Operating Reserves Initiative Workgroup (NORI).

In December 2008, NORI prepared a white paper titled “Maintaining Nonprofit Operating Reserves.” At that time some of the members of NORI thought that there was still work to be done in this area to help nonprofit organizations and their boards of directors to determine and establish operating reserve policies, so they formed the Operating Reserves Policy Toolkit Workgroup (Toolkit Workgroup) as a logical follow-up. Members of the Toolkit Workgroup have compiled an “Operating Reserves Policy Toolkit” (Toolkit) to serve as a technical reference for the nonprofit boards and staff policy committees, as well as their financial consultants and professionals, as they respond to the message of the whitepaper.

The Operating Reserve project set out to do several things, including:
• Define what an operating reserve is and what types of reserves an organization may have.
• Answer how does a board approved operating reserve operate within the confines of generally accepted accounting principles.
• Assist in determining what the appropriate amount of operating reserves may be and determine whether the nonprofit can afford to set aside these amounts.
• Identify the sources of funds that can be used to establish and grow the operating reserves.
• Identify the appropriate uses of operating reserves.
• Answer how often the operating reserve policies and balances should be reviewed.
• Address what the Board’s role is in accessing operating reserves surplus and shortfalls.
• Discuss investment considerations related to operating reserves.
• Address the legal and tax considerations related to operating reserves.

The white paper, like many projects that the leaders in the BDO Institute for Nonprofit Excellence work on, tries to deal with issues, regulations, guidance and problems that the nonprofit industry is currently dealing with but also what may be on the horizon.

This purpose of this Toolkit is to provide a resource to:
• Help make a compelling case within the organization for the need to establish an operating reserve,
• Provide factors to take into consideration in determining the size of the operating reserve for an organization,
• Suggest practices for managing the reserve and reporting its balance, and
• Offer some tools with which to go about drafting a policy to record decisions.

This Toolkit is sponsored by the National Center for Charitable Statistics, Center on Nonprofits and Philanthropy at the Urban Institute, United Way Worldwide and many others.

Dick Larkin has written several articles on the subject of Operating Reserves over the years, one of which has been published several times and is used as the forward in the Operating Reserve Policy Toolkit for Nonprofit Organizations White Paper titled “Nonprofits and Squirrels,” in which he compares operating reserves to a squirrel’s tendency to store nuts for the winter.

You can find the white paper at the following web link: http://www.nccs2.org/wiki/index.php?title=Main_Page

You can find the Operating Reserves Policy Toolkit at the following web link: http://www.nccs2.org/wiki/index.php?title=Main_Page

For more information contact Lee Klumpp, director, at lklumpp@bdo.com.

*This article originally appeared in BDO USA, LLP’s “Nonprofit Standard Issue 23” (December 15, 2010). Copyright © 2010 BDO USA, LLP. All rights reserved. http://www.bdo.com