It is wise for nonprofits to have a robust operating reserve, ensuring the organization’s finances are secure and stable over the long term. Emergencies happen, and having a “rainy day” fund can prepare your organization for challenging circumstances.
You may be wondering, “how much money can nonprofits keep?” In this article, we will investigate policies governing nonprofit finances, common sources of nonprofit revenue, and best practices for nonprofit financial management.
Let’s dive in.
Sources of Revenue for Nonprofits
Nonprofit organizations have several common sources of revenue that contribute to their operational and programmatic finances.
Nonprofits do not operate to make a profit in the way private enterprises do. They exist to further or achieve a specific mission. Nonprofits must rely on individuals, communities, corporations, government entities, or private foundations to give money in support of the organization’s mission to earn revenue.
While there are many ways a nonprofit can secure funding, there are four key sources of nonprofit revenue that make up the bulk of most nonprofit organizations’ finances.
Individual giving refers to the process of nonprofit organizations soliciting individual persons for donations. Donations secured from individuals are typically smaller amounts of money than given through grants or corporate sponsorships but are just as crucial to an organization’s operations.
Individuals give to nonprofits in a variety of ways, including:
Developing a strong individual giving strategy is vital to the financial sustainability of your nonprofit organization.
While a grant or sponsorship may result in a large sum of money, these types of funding are often one-time or restrictive in the way they can be spent. Securing the support of many individuals can help you secure a large pool of flexible funding for many years to come and allows you to engage with a large audience that is passionate about your mission.
Corporate sponsorships are donations made by corporations or other private enterprises in support of nonprofit initiatives. A sponsorship is a very common source of earned revenue for nonprofits.
This type of partnership is attractive to businesses because it is a mutually beneficial relationship. The business or corporate entity provides the nonprofit organization with financial support in exchange for increased name recognition and the positive marketing that comes from lending their support to a worthy cause.
Typically, corporate sponsors will often support a special fundraising event such as a 5K race, concert, or annual gala. In exchange, nonprofits will print their logo on signs, banners, or other collateral related to the event.
Notice the logos at the bottom of the page for the St. Jude Walk/Run celebrating the contributions from their corporate sponsors. This is a great way for businesses to generate positive name recognition and associate their brand with a worthy cause.
Corporate sponsors who support a project, initiative, or other area of the nonprofit’s work may receive special recognition in the organization’s annual report, on the nonprofit’s website, or on social media. It all depends on the type of partnership agreed upon by the nonprofit and the corporation.
Public grants or government grants are major sources of funding for nonprofit organizations. Government grants are typically very large and can sustain a program or organization for a full year or sometimes much longer without any additional support.
Government grants can be awarded by:
The U.S. Federal Government
City, County, or Municipal Governments
However, government grants are highly regulated and very restrictive. This is because grants are funded through taxpayer dollars and are governed by very specific rules and regulations. Preparing a proposal and reporting on funds spent through government grants can be a complex and exhaustive process and requires a robust staff of employees to complete.
Despite the extensive planning and work that goes into government grants, they can be an effective and resilient source of funding for your nonprofit organization. Find out more about government grants here and consider if this is a good option for your organization.
Private grants or foundation grants are charitable donations made by private organizations, typically funded by wealthy individuals or families. These grants provide financial support for specific initiatives such as educational initiatives, medical research, public works projects, and other charitable causes.
A great example of a private foundation that awards grants to nonprofit organizations is the Robert Wood Johnson Foundation (RWJF). RWJF focuses their work on health equity and building a culture of health by informing transformative policy change and addressing pressing health issues by working with individuals and families, communities, and institutions.
Private foundation grants can be restrictive depending on the institution awarding the grant. However, foundations are not governed by the same rules and regulations that government grants are, and as such they are able to award flexible dollars that nonprofits can use how they see fit.
In fact, many private foundations award general operating dollars, which give nonprofits total freedom to apply funds to areas of greatest need, including overhead costs. This makes private grants critical for developing sustainable streams of funding.
How Much Money Can Nonprofits Keep?
So how much money can nonprofits keep?
The short answer is that there is no limit to the amount of money nonprofits can keep in reserves. As long as it can be proved that funds are being used to advance the nonprofits’ mission, then the money can be directed as the nonprofit wishes.
While nonprofits can certainly obtain unrestricted funds that they can use how they see fit, that does not mean that nonprofits can use donations or funding for literally anything. Organizations need to prove that donors are giving money to a specific cause or mission and that those funds are being used to further that mission.
Each year nonprofits report on their finances to the IRS by filling out a form 990 to report on how much revenue the nonprofit has earned and how the money is spent. Most nonprofit organizations will also publish a publicly available annual report where they report on outcomes and impact, illustrating how the revenue earned was best utilized.
While nonprofits are not limited in the amount of money they can keep in reserve, that doesn’t mean that there aren’t best practices and processes they should abide by.
According to industry best practices nonprofit organizations should keep approximately 3 to 6 months’ operating expenses in reserves. Reserves should not exceed the amount of two years’ budget nor should they be less than one month's operating budget.
Keeping this amount of money in reserves provides nonprofit organizations with financial security, allowing them to combat unforeseen challenges or unforeseen economic hardships that may arise.
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What Are Internal Policies for Nonprofits Regarding Money?
Financial controls, or internal controls as they are sometimes referred to, are financial management processes and practices put in place by nonprofits and businesses alike to secure an organization’s assets and avoid financial malfeasance by staff.
Some common internal controls include:
Internal audits to ensure that all financial activities are adhering to recognized standards and norms as laid out by your organization.
Separation of duties, meaning that more than one individual manages different financial tasks and all tasks are reviewed by another person to ensure consistency and accuracy. Such a task that would require separate duties would be entering and approving expenses or reconciling deposits.
Physical controls such as locking rooms, drawers, or safes where assets such as checks and cash are kept.
Data and information controls implemented to ensure all financial information is private and secure. This could be ensuring appropriate individuals have access to sensitive financial information and all entered data has been reviewed and checked for accuracy.
Nonprofits should also implement internal financial policies and procedures as directed by standard-setting entities.
The Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) have issued a series of practices and controls to be employed across sectors, known as the General Accepted Accounting Principles (GAAP). Abiding by GAAP ensures an organization is following appropriate policies, rules, and regulations and that financial reports are accurate and consistent.
How Can This Help With Donations to the Nonprofit
Following best financial practices and ensuring your organization is up to date and adhering to appropriate rules and regulations governing nonprofits is vital to retaining and securing support from individuals, public entities, and foundations.
Knowing your nonprofit’s finances are in order and are managed ethically and effectively can help you confidently build trust with supporters. Many nonprofit organizations will publish a list of their key supporters on their website or their annual report.
Take for instance the annual report for the National Alliance on Mental Illness (NAMI). In their annual report they state how much money they have raised nationwide and how much revenue they brought in through specific fundraising initiatives.
Nonprofits also often publish internal financial reports or their recent 990 forms to their websites so supporters can review the documents and have access to their financial information. Making financial records publicly available is a nonprofit best practice and is a clear sign to potential and current donors that you value integrity and transparency.
Wrapping Up: The Next Steps
So how much money can nonprofits keep? There really is no limit, and at the end of the day it depends on a specific nonprofit’s situation and how much income they can earn through various fundraising strategies.
It is important to make sure you are following policies, rules, and regulations and implementing appropriate controls and best practices. By ensuring your organization has top-notch financial management you will be able to increase public trust and begin allocating funds to save for any challenge or emergency that comes your way.
Follow Instrumentl’s blog for more insight into nonprofit financial management and best practices to help grow your organization and help it thrive!
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