3 Keys to Financial Health: Build Reserves in Good Times for Use in Hard Times

This is part 2 of the 3 Keys to Financial Health series. You can read part 1, Don’t Borrow from Your Future here.

2) Build reserves in good times, so that you can use them in hard times.

But how do we know when the good times are? Obviously, “good times” is a relative term. Just talk to someone from Detroit who heard all about the “good times” of the 1990’s as they were losing their jobs and homes.

What I mean by good times is when funding sources are growing. For most of the social justice groups that we work with that means when private foundation funding is growing. And we can get a good idea of that by watching the stock market. When the stock market is rising [and therefore endowed private foundation funding is expanding], you need to plan a surplus budget [i.e. raise more $$ than you spend] so you are building your reserves, which are called Unrestricted Net Assets in nonprofit financial lingo.

When the stock market declines [and private foundation funding along with it], you can plan a deficit budget [i.e. spending more than you’re raising], which will draw from your previous reserves, your Unrestricted Net Assets.

You will have to give up some program growth during good times so that you can maintain your program activities during the hard times. This helps to smooth out the funding ups and downs and provides programmatic stability.

This is the classic story of the Ant and the Grasshopper. The ant stored food during the abundant summer months in anticipation of the lean winter ones. Meanwhile the grasshopper mocked the ant while playing during the summer months. When winter arrived the ant ate well while the grasshopper —not so much. Be the ant not the grasshopper.