Do nonprofit organizations have working capital?

Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial reserves are equivalent to working capital utilized by for-profit businesses in that the reserves are used to cover the organizations' liabilities and allow them to operate on a day-to-day basis.

The financial fire faced by many nonprofit organizations surrounds the concept of working capital, or financial reserves, the organizations keep on hand. In general, contributors expect any resources donated to a nonprofit organization will be used to support the product or service the organization provides and not to be kept idle in an account.

Every company or organization, however, requires funds to operate and to provide the goods or services it offers regardless of whether it is a nonprofit or for-profit organization. There are numerous nonprofit organizations that struggle to raise enough funding to support their causes, and many see keeping cash on reserve as a necessity. Still, every year, around the world, organizations suffer and fall apart because of a lack of such reserves. The survivability of these organizations depends on having sufficient operating capital to sustain operations in the face of unexpected emergencies and economic downturns.

In the nonprofit world, working capital is commonly referred to as an "operating reserve." Generally, nonprofit boards that oversee the regulations for nonprofits specify an acceptable amount an organization can keep as unrestricted cash to maintain operations. In most cases, the board recommends the nonprofit organization keep two to four months of cash on hand to cover all operating expenses, or a certain percentage of the organization’s annual income. These figures depend entirely on the services or goods provided and the total overall income received, and may change from one year to the next. Ultimately, each nonprofit organization must set and maintain its reserve.