How to Build Reserves
The primary purpose of a not-for-profit organisation or social enterprise is to make an impact on behalf of those it represents or supports. But there is also a secondary requirement, without which the primary purpose becomes at risk: - financial sustainability.
A key element of financial sustainability is ensuring that the organisation has enough free reserves to sustain itself should income dry up. The rule of thumb is that ideally this should be at least three months of running costs, but each organisation will have different circumstances on this.
Free reserves rise when income exceeds expenditure, so typically organisations wanting to build reserves do two things:
1. Make cost reductions
2. Increase income
Cost reductions can be tough, especially if it involves people. It can distract and demotivate staff, and make work more difficult to do. At its worst, you can end up throwing the baby out with the bathwater - costs might be saved but productivity or efficiency lost.
On the other hand, raising new income is getting increasingly competitive and difficult, as funders become more sophisticated at seeking and measuring the return on their donations.
So, is there a third way? Well, possibly.....
1. Recover your overheads
Many non-profit organisations don’t know what their overhead levels are, and many others do not focus on fully recovering those overheads when bidding for work. When seeking grants, organisations should aim to recover the full cost of whatever they are delivering - otherwise you're making a loss.
But to do this, you first of all need to understand your cost base. Then you can create the narrative that allows you to negotiate confidently with funders to price correctly.