DAISI’s finance reserve is an unrestricted fund balance set aside to stabilize its finances by providing a cushion against unexpected events, losses of income, and large unbudgeted expenses.
- finance reserves must be reliable, with a realistic plan to replenish them.
- Finance reserves should not be used to cover a long-term or permanent income shortfall.
- Reserves can allow DAISI to weather serious bumps in the road by buying time to implement new strategies.
- Reserves should be used to solve temporary problems, not structural financial problems.
- In the worst case scenario, reserves can be used for an orderly shut down of the organization.
- DAISI will maintain its reserves by setting aside cash in addition to the regular bank fund balances for use when regular cash flow is disrupted.
- Reserves are also different from restricted funds. Restricted funds are grants and contributions that have been received for specific programs or projects. These funds are “restricted” for use according to the grant agreement or donor’s instructions. Sometimes this means that restricted funds sit idle in the bank for a while and the nonprofit cannot use those funds for some other purpose.
- Finance Reserves, on the other hand, are “unrestricted” funds that can be used in any way that the nonprofit’s management and board chooses.