One of the most impactful grant programs the Kendeda Fund has ever undertaken was funding our nonprofit partners’ operating reserves. At the end of 2023, Kendeda will be “sunsetting”—winding down three decades and nearly $1.2 billion in grantmaking—and this relatively modest ($7.6 million) and decidedly “unsexy” grant initiative began as a way to prepare our grantee partners for life “after Kendeda.” But it has had such an outsize impact on partner organizations and the people they serve that we feel compelled to share what we learned in the hope that other philanthropies might consider similar programs.

According to the Nonprofit Operating Reserves Initiative (NORI), “Operating reserves” are the portion of “available unrestricted net assets” that an organization’s board maintains and/or has formally designated (or reserved) for use in emergencies, to sustain financial operations in the event of significant unbudgeted increases in operating expenses and/or losses in operating revenues. The minimum operating reserve ratio, at the lowest point during the year, suggested by the NORI is 25 percent, or three months of the organization’s annual expense budget.

A minority of nonprofits have more than six months of cash in reserve, according to reports like the Nonprofit Finance Fund’s State of the Sector; many have less than three months of operating reserves on hand. While living that close to financial insolvency may be common, it is extremely risky for any nonprofit, not just those whose funders are sunsetting. This lack of financial security can have a complicating ripple effect throughout an organization, making it hard for leadership to make decisions, address crises, and forecast future opportunities.

“An operating reserve fund lets us be agile and think ahead, rather than react to immediate funding needs,” as Gary Burnett, Heart of the Rockies Initiative put it; “It lets us exist and operate in a strategic, proactive space rather than a fear-based, resource-scarce mindset.”

In early 2019, with the foundation’s sunset still five years away, Diane Ives, Fund Advisor for our “People, Place & Planet Program,” began to brainstorm ways to set up grantees for success after Kendeda’s funding stopped. “I focused on operating reserves because we know that the nonprofits that are the most impactful and resilient are those that have a healthy balance sheet,” explained Ives. “Additionally, there is a clear set of best-practices, benchmarks, and demonstrated impact with operating reserve funds.”

Ives’ goal was to develop a robust funding program that would strengthen the core operations of Kendeda’s grantee partners, now and in the future, to build an operating reserve fund that would be the equivalent of at least three months’ operating expenses (and give them the resources, support, and space to do it in a way that made sense for their organization).

Read the full article about establishing operating reserves by Christine Hunt at Stanford Social Innovation Review.