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Financial Reserves

(To avoid discussion of current Libertarian politics, you are seeing numbers from the year 2010)

ing in new members, they’ll be more inclined to give. Now the process will build on itself.

Prudent Financial Reserves

Every financial adviser you can name recommends to their clients that they build a prudent reserve fund, held in cash or equivalents, for a “rainy day.” You never know when you’ll have an unexpected expense, medical emergency, temporary job loss or cash flow crunch. Sometimes you know well in advance you will have big expenses. The time to begin saving to cover them is yesterday.

Most experts believe that three months of such a reserve is a bare minimum; six months is more comfortable.

Consider the situation of the Libertarian Party, however. At November 30, 2009, the cash balance was $49,000. That would be roughly two weeks’ expenses, at the then-current run rate. At the end of May, 2013, the LNC had $315,191.84 cash on hand. However, of that amount roughly a quarter-million dollars was the building fund, money raised only for a specific purpose. The LNC had on hand financial reserves well under one hundred thousand dollars, sufficient to cover about a month’s worth of operating expenditures. The LNC does have a required financial reserve: It covers only the building labor costs, and governance costs–overhead–and that only for a single month.

 That’s right. Two weeks. One month. The situation has improved a bit in the last three years, but the Party is still in a precarious state.

If you don’t want to take the word of a financial advisor, consider the words of the Nonprofits Assistance Fund. This is a Minneapolis-based nonprofit whose mission is to build financially healthy nonprofits that foster community vitality. They discuss the need for an operating reserve and discuss the prudent level for that reserve:

An operating reserve is an unrestricted fund balance set aside to stabilize a nonprofit’s finances by providing a “rainy day savings account” for unexpected cash flow shortages, expense or losses. These might be caused by delayed payments, unexpected building repairs, or economic conditions.

Reserves should not be used to make up for income shortfalls, unless the organization has a plan to replace the income or reduce expenses in the near-term future. In short, reserves should be used to solve timing problems, not deficit problems.

A commonly used reserve goal is 3-6 months’ expenses. At the high end, reserves should not exceed the amount of two years’ budget…. each nonprofit should set its own reserve goal based on its cash flow and expenses. Organizations that have contracts or fees with regular and reliable payments don’t need as much in cash reserves as organizations that rely on periodic grants, fundraising events or campaigns, or seasonal activities.