Operating Reserve Ratio

This ratio is a focused variant of the Months Cash on Hand ratio. It measures the number of months of average monthly expenses that could be covered by reserve funds that are specifically designated by the board for operating. (Other reserve funds could be designated for non-operating purposes, such as capital acquisition or building maintenance.) The operating reserve ratio is a valuable indicator of financial flexibility and health, and an indicator that the board has proactively focused on sustainability. The basic formula for this ratio is:

               Unrestricted Board Designated Reserve Funds ÷ Total Annual Expenses = %

                   % x 12 = # months covered

Signal:  Positive is good; above 25% (equivalent to three months) is better; upward trend is good. Negative is not good; under 25% or downward trend may be cause for concern.

Calculation:  Be clear about what comprises your calculation factors. If non-cash expenses, such as in-kind goods and services or depreciation, are significant, you may want to exclude those expenses from the “total annual expenses” amount.

Caveat:  An organization needs to determine what its own healthy reserve ratio is. The minimum of 25% recommended by the Nonprofit Operating Reserves Initiative may not be adequate for groups with high revenue volatility and/or less or no controllable expenses.