Surviving the Black Swan Event: How Much Reserves Should Nonprofit Organizations Hold?

Abstract

Organizational survival is a primary current focus, as the unforeseen economic effects of the pandemic ravage the civil sector. Over time, however, we turn to questions of resilience: How can organizations prepare for rare, but devastating, financial shocks? Three months of funds to cover operating expenses are often described as a suitable savings target. However, organizations differ greatly in their revenue volatility, which suggests that “3 months” may severely underestimate the reserves that certain organizations should hold. We measure revenue volatility and calculate reserve fund targets for 25 nonprofit subsectors, showing sharp differences in optimal savings levels ranging up to 1 year of total expenses. We also explore organizational characteristics associated with revenue volatility. We argue for a resilience strategy that goes beyond optimizing the contents of the revenue portfolio. Funders and nonprofit practitioners should consider the broader context of financial resilience that includes correctly sized reserves as a stabilizing force.