The short answer: A nonprofit should hold at least three months of operating expenses, or 25% of its annual budget, in unrestricted operating reserves at the lowest point of its year. That minimum comes from the Nonprofit Operating Reserves Initiative (NORI) Workgroup, which also recommends that every board set its own target in a written reserve policy. Organizations that rely on government grants, reimbursement contracts or a few large funders usually need more.
Why are reserves an urgent question for nonprofit boards right now?
Many nonprofits are below that minimum just as their funding has become less predictable.
- In Nonprofit Finance Fund’s 2025 State of the Nonprofit Sector Survey of 2,206 organizations, 52% had three months or less of cash on hand, and 18% had one month or less.
- Among nonprofits that answered NFF’s survey in both 2022 and 2025, the share with six months or more of cash fell from 36% to 26%.
- In the Center for Effective Philanthropy’s State of Nonprofits 2026 survey, 39% of nonprofits reported a deficit for fiscal 2025, up from 22% in 2022, and 44% said they were considering using reserve funds.
Government funding is the biggest source of volatility. In 2025, 35% of nonprofits had at least one government funding disruption, according to the Urban Institute’s October 2026 report; among nonprofits with any government funding, the share was 49%. The rate rises with size: 49% of nonprofits with $1 million to $9.9 million in expenses and 55% of those with $10 million or more were affected. Many disruptions were delays rather than cuts, and nearly half of nonprofits with a delay had at least one that lasted 12 weeks or longer. Among Nonprofit Finance Fund respondents with government funding, 55% were paid late, and 11% reported average delays of more than 90 days. A reserve is what covers payroll while a payment is late.
What counts as an operating reserve?
An operating reserve is the part of a nonprofit’s unrestricted, available net assets set aside to cover revenue gaps, delayed payments, or unexpected costs. Not every dollar in the bank qualifies.
- Counts: unrestricted cash and short-term investments the board can use for operations.
- Does not count: donor-restricted gifts, grant funds advanced for future program work, endowment principal, and buildings or equipment.
This distinction is built into nonprofit financial statements. Under FASB ASU 2016-14, nonprofits report net assets in two classes, with and without donor restrictions, and disclose how much of their financial assets are available for general expenses within one year. Your auditor reviews that disclosure every year. Your board should see the same picture more often.
How do you calculate months of reserves?
Divide unrestricted, available net assets by one month of operating expenses:
Months of reserves = unrestricted available net assets ÷ (annual operating expenses ÷ 12)
A nonprofit with a $4.8 million annual budget spends about $400,000 a month. A three-month reserve is $1.2 million. A six-month reserve is $2.4 million.
How much should your nonprofit hold?
Start at the three-month minimum and raise the target for each risk your organization carries:
- Concentrated revenue. If one funder or contract provides a large share of revenue, losing it would be a shock the reserve has to absorb.
- Reimbursement-based grants. Government contracts that pay after you spend require you to front the cash.
- Seasonal giving. If much of your revenue arrives at year-end, your lowest cash point may fall months earlier.
- Fixed commitments. Leases, multi-year staff commitments and debt payments cannot be cut quickly.
A line of credit can supplement a reserve, but it is not a substitute: it has to be repaid and may not be available when conditions tighten.
What should a reserve policy include?
NORI recommends a written, board-approved policy. At a minimum, it should state:
- The target, in months or as a percentage of the budget
- How the reserve is calculated and which assets count
- Who can authorize a draw, and for what purposes
- How quickly the reserve will be rebuilt after a draw
- How often the board reviews it, at least once a year
What should the board see to manage cash?
A board cannot manage reserves it sees once a year. The core monthly package is a statement of financial position, a statement of activities, and a budget-to-actual report. When funding is uncertain, add a cash forecast and a summary of restricted funds, so the board can see how much cash is truly available rather than how much is in the bank.
The bottom line for leadership
Know your number: months of available, unrestricted cash at the lowest point of your year. If it is under three months, or under your board’s own target, put a written reserve policy and a plan to rebuild on the next board agenda.
Frequently asked questions
What is a good operating reserve ratio for a nonprofit?
The most cited minimum is 25% of annual operating expenses, about three months, from the Nonprofit Operating Reserves Initiative. Organizations with volatile or government-dependent revenue often set a higher target.
Do restricted funds count as operating reserves?
No. Donor-restricted funds can only be used for the purpose or time period the donor specified, so they are excluded.
Can a nonprofit have too much in reserves?
A reserve well above the policy target with no stated purpose can raise questions from donors. A written policy explains why the reserve exists and how it will be used.
About MFO Nonprofit Accounting
MFO Nonprofit Accounting provides outsourced accounting, controller and CFO services to nonprofit organizations. Founded in 2018 in Franklin, Tennessee, it has served more than 165 nonprofits. MFO does not perform audits or prepare tax returns; it works alongside each client’s auditor and Form 990 preparer.
Sources
- Nonprofit Finance Fund, 2025 State of the Nonprofit Sector Survey, executive summary
- Nonprofit Finance Fund, survey press release, June 17, 2025
- Center for Effective Philanthropy, State of Nonprofits 2026
- Urban Institute, Prevalence, Persistence, and Financial Implications of Government Funding Disruptions, October 2026
- Nonprofit Accounting Basics, About Operating Reserves (NORI benchmark)
- Journal of Accountancy, FASB not-for-profit financial reporting standard (ASU 2016-14)