As nonprofits navigate a complex landscape shaped by economic volatility, delayed government reimbursements, philanthropic shifts, and increasing service demands, maintaining operational continuity requires more than reactive budgeting. It requires a forward-looking financial strategy— one grounded in resilience, liquidity, and the flexibility to respond to risk. At the heart of this strategy is the net operating reserve (NOR).
NORs — board-designated, unrestricted net assets set aside for operating continuity — have emerged as a cornerstone of nonprofit financial health, enabling mission-driven organizations to withstand disruption, plan confidently, and pursue opportunity. Yet, many nonprofits underutilize or misunderstand this tool. This article provides a roadmap to help nonprofit leaders and boards understand, build, and govern NORs with clarity, intention, and purpose.
What are NORs?
A Net Operating Reserve is a portion of unrestricted net assets that a nonprofit’s board has designated for stabilizing operations in times of financial stress. NORs are different from working capital or rainy-day funds. They are specifically governed by board-approved policies, with clearly defined purposes, usage conditions, and replenishment plans.
Unlike restricted funds or endowments, NORs are flexible and liquid, typically held in cash or near-cash assets, and available for use to:
- Offset delayed revenue
- Cover emergency expenses
- Sustain operations during downturns
- Bridge budget gaps or support strategic pivots
The Case for NORs in an Uncertain Environment
Recent disruptions — from the COVID-19 pandemic to rising inflation, delayed federal reimbursements, and changing donor behaviors — have exposed the fragility of nonprofit financial models. Many organizations, particularly small to mid-sized ones, operate with less than three months of operating reserves, according to the Urban Institute’s Nonprofit Operating Reserves Initiative (NORI) research.
NORs serve as a stabilizer as well as a strategic tool for navigating disruption, sustaining impact, and maintaining trust.
Strategic Benefits of NORs
| Benefit | Description |
|---|---|
| Continuity of Services | Allows uninterrupted service delivery even when cash flow is strained. |
| Cash Flow Stability | Reduces the need for costly short-term loans or improper use of restricted funds. |
| Time to Pivot | Gives leadership time to evaluate and respond to challenges with a strategic lens. |
| Strategic Investment | Creates opportunity capital for technology, capacity-building, or mergers and acquisitions. |
| Donor and Funder Confidence | Signals financial stewardship and sustainability. |
| Organizational Morale | Promotes confidence among staff and board during periods of instability. |
Common Concerns and Misconceptions
While the benefits are compelling, some nonprofits hesitate to build NORs due to perceived drawbacks or philosophical objections.
Considerations
| Concern | Explanation | Response |
|---|---|---|
| Perception of hoarding | Donors or watchdogs may view large reserves as signs the nonprofit does not need more support. | Communicate transparently that reserves are essential to ensure mission continuity or specific activities. |
| Opportunity cost | Idle cash may yield limited return. | Use part of the reserve as “risk capital” or in mission-aligned short-term investments. |
| Resistance from leadership | Some boards or staff may prefer to deploy all available funds immediately. | Provide education on reserves as a sustainability strategy, not a barrier to impact. |
| Policy and accounting confusion | Misclassifying restricted assets or lacking clear designation protocols. | Follow FASB ASC 958 and use board resolutions and appropriate general ledger entries. |
Step-by-Step Framework for Building NORs
Establishing an effective NOR requires planning, policies, and integration into broader financial management. Here is a step-by-step approach aligned with NORI best practices.
Step 1: Educate and Align Leadership
- Provide briefings to board members and senior management.
- Emphasize how NORs help avoid crises and preserve mission impact.
- Use data from sector studies (e.g., Urban Institute, Charity Navigator) to support the case.
Step 2: Assess Financial Position and Risk
- Evaluate current unrestricted net assets and liquidity ratios.
- Conduct a risk assessment: What disruptions would most affect your operations?
- Calculate current “months of reserves” based on core operating expenses.
Step 3: Define a Reserve Target
- Set a clear goal, typically expressed as:
- 3 to 6 months of expenses (common benchmark)
- Dollar amount based on payroll, rent, core program delivery
- Customize based on revenue volatility, funding diversity, and fixed cost structure.
Step 4: Develop a Reserve Policy
A comprehensive board-approved operating reserve policy should include:
- Purpose statement: Stabilization, not investment
- Target level: Specific percentage or amount
- Conditions for use: Emergencies, cash delays, strategic opportunities
- Approval process: Determine if use will be authorized by executive director, chief financial officer, finance committee, or full board
- Replenishment: How the reserve will be restored after use (e.g., annual surpluses)
- Reporting and review: Reserve status tracked in board financial reports
Step 5: Designate and Record the Reserve
- Approve the reserve via board resolution.
- Record in the general ledger:
Unrestricted Net Assets – Board Designated: Operating Reserve - Ensure assets are liquid and conservatively invested (e.g., cash, money market).
Step 6: Integrate into Financial Management
- Align reserve goals with annual budgets.
- Include reserves in:
- Monthly financial reports
- Audit footnotes (ASC 958-205-45 liquidity disclosures)
- Fundraising strategies (as part of financial resilience narrative)
Step 7: Monitor, Communicate, and Adapt
- Report reserve levels quarterly to board finance committees.
- Replenish over 2–3 years if used.
- Communicate with funders and donors about how NOR supports impact as opposed to delaying it.
Governance and Oversight Considerations
For the NOR to function as intended, nonprofit boards must:
- Understand the difference between unrestricted, restricted, and board-designated funds.
- Commit to regular review of the reserve policy (every 2–3 years).
- Ensure reserve levels align with the organization’s evolving risk landscape.
- Resist the temptation to access reserves for convenience rather than strategic necessity.
The NORI Legacy and Available Resources
The NORI , led by the Urban Institute, established sector-wide definitions, benchmarks, and toolkits for operating reserves. Key resources include:
- White Paper: “Maintaining Nonprofit Operating Reserves” – outlines rationale and benchmarks
- Policy Toolkit: Sample policies, reserve ratio worksheets, communication guides
- Data Analysis: Research showing that a large portion of nonprofits hold dangerously low reserve levels
There are resources noted below that are available through the Greater Washington Society of CPAs’ Nonprofit Accounting Basics portal and the Urban Institute’s website to assist in developing NOR.
A Call to Action for Financial Stewards
In an era of volatility and complexity, nonprofit financial leadership demands more than fiscal compliance — it demands fiscal foresight. NROs that are properly governed and clearly communicated are not a sign of excess. They are badges of responsibility, tools of adaptability, and lifelines for mission continuity.
Nonprofit boards, CFOs, and executive teams should treat the development of NOR as a strategic imperative, not a luxury. Start with education, proceed with policy, and sustain it with disciplined governance. The next time uncertainty strikes, your organization will be ready—not scrambling.
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