Learn how nonprofits can build and use reserves with confidence — and back decisions with clear, mission‑focused reasoning.
CLA recently hosted a webinar discussing relevant accounting, audit, and tax updates for nonprofit organizations in 2026 and beyond.
Many attendees addressed questions pertaining to the operating reserve — from understanding the key ratios to redeploying assets to reflecting uncertainty in the development of the reserve policies.
We see the real financial tensions many nonprofits are navigating right now and we offer practical, plain language guidance to help nonprofit leaders and boards think through these issues.
Understanding the operating reserve ratio
This commonly used liquidity and stability measure asks a simple question: How long could the organization continue operating using only unrestricted net assets, without receiving any additional revenue?
The ratio is calculated as:
Unrestricted Net Assets ÷ Annual Operating Expenses = Operating Reserve Ratio.
This ratio is often translated into months of operating coverage. In a recent survey by The Nonprofit Finance Fund, most organizations said they don’t have enough cash reserves — with 52% reporting three months or less in operating cash, which is up from the 39% in the last survey in 2021. [Source: NFF Nonprofit Finance Fund, 2025]
How does your organization stack up, and does this feel like the “right” number? There is no one-size-fits-all answer, and appropriate reserve levels depend heavily on revenue concentration, payment timing, and external uncertainty.
How should nonprofits with substantial reserves think about deploying those assets?
The key question for leadership and boards is whether reserves are purpose-driven and intentional or simply an accumulation of funds. Healthy ways to think about deploying those reserves should consider:
- Mission acceleration — Time limited investments that enable the organization to serve more people, expand programs, or deepen impact.
- Capacity building — Strategic investments in systems, staff, technology, or infrastructure that strengthen the organization over the long term.
- Risk management — Using reserves to absorb volatility or to fund restructuring efforts for sunsetting programs.
Importantly, deploying reserves does not imply spending without discipline. Funders are often less concerned about whether reserves are used than whether leadership can clearly articulate the why behind them.
How can nonprofits report reserve-funded investments without simply showing a large deficit?
This is a common concern — and a nuanced one. From an accounting perspective, using reserves will often show up as an operating deficit. However, context matters — so if the organization already prepares an annual report with a management and discussion section, consider opportunities to provide narrative that includes:
- Showing how deficits were planned and how they were funded
- Providing a multi-year view to demonstrate sustainability even when a single year reflects higher spending
- Denoting why this intentional deficit aligns with mission and strategy
Reflecting funding uncertainty and reimbursement delays in an operating reserve policy
For organizations heavily reliant on federal grants and reimbursements, traditional reserve guidance may be insufficient. The organization may consider operating reserve policies that acknowledge the concentrations of risk, potential timing delays, and renewal uncertainties.
Consider policies that set higher-target reserve ranges to account for uncontrollable delays — and link those reserve targets to months of payroll and fixed costs, not just percentages. By naming these risks directly in policy, boards make it clear that reserves are not excess — they are a deliberate response to structural uncertainty.
How CLA can help
Across all of these questions, a consistent theme emerges: intentionality matters more than perfection. Whether discussing reserve levels, planned deficits, or federal funding risk, nonprofits are better served when financial decisions are clearly explained, strategically aligned, and transparently governed.
CLA combines industry insight with deep technical capabilities to help nonprofit organizations in their decision making. We collaborate with management to understand the operational intent behind reserves and budgeting process.