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 which is one grounded in resilience, liquidity, and the flexibility to respond to risk. The main point of this strategy is the net operating reserve.

Net operating reserves which are 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 net operating reserves with clarity, intention, and purpose.

What are Net Operating Reserves?

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

Strategic Benefits of Net Operating Reserves

• 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.

Framework for Building Net Operating Reserves

Establishing an effective net operating reserve requires planning, policies, and integration into broader financial management.

1. Educate and align leadership

• Provide briefings to board members and senior management
• Emphasize how net operating reserves help avoid crises and preserve mission impact
• Use data from sector studies to support the case

2. Assess financial position and risk

• Evaluate current unrestricted net assets and liquidity ratios
• Conduct a risk assessment
• Calculate current months of reserves based on core operating expenses

3. Define a reserve target

• Set a clear goal, typically expressed as 3 to 6 months of expenses and dollar amounts based on payroll, rent, core program delivery
• Customize based on revenue volatility, funding diversity, and fixed cost structure

4. Develop a reserve policy

• 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

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

6. Integrate into financial management

• Align reserve goals with annual budgets
• Include reserves in monthly financial reports, audit footnotes and fundraising strategies

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 net operating reserves support impact as opposed to delaying it

Final Thoughts

In an era of volatility and complexity, nonprofit financial leadership demands more than fiscal compliance as it demands fiscal foresight. Net operating reserves 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 net operating reserve as a strategic imperative. Start with education, proceed with policy, and sustain it with disciplined governance.