As we know, nonprofit organizations are crucial to the lives of our communities. They work tirelessly to serve their mission and make the world a better place. But with unending disruption and economic uncertainties, nonprofits must have the financial security to continue working effectively. One way to achieve this is by creating a Rainy day Fund.

A rainy day or reserve fund is vital in a complex world. It allows you to keep going in case you experience shocks to the system, like a recession or another pandemic. Moreover, it’s an opportunity to ask your donors to step into the generosity circle by creating a vital fund with you. So let’s start by exploring why it’s essential and how to start building one.

What is a rainy day fund?

A rainy day fund, also known as a reserve fund, is a sum of money set aside by an organization. The purpose of it is to help mitigate financial risk during uncertain times. It’s a cushion that nonprofits can fall back on during emergencies or to pay for unexpected expenses. And it also helps in case there’s a decline in revenue. The primary aim of a rainy day fund is to ensure your nonprofit can continue to operate financially, even when faced with financial difficulties.

Why do nonprofits need a rainy day fund?

Nonprofits operate in an unpredictable environment that can be affected by factors beyond their control. They rely on donations, grants, and other Funding Sources, which can fluctuate over time. For example, a sudden drop in donations due to economic downturns, changes in government policies, or unexpected events like a natural disaster can threaten a nonprofit’s financial stability.

A rainy day fund with at least 6 months of operating revenue is vital. A nonprofit with a well-established rainy day fund is better equipped to navigate financial difficulties and keep its doors open during challenging times. For example, in case of a crisis, you can use to keep people working as you redouble your efforts in fundraising. (Check out our FREE fundraising ideas guides).

How to start building a rainy day fund.

Building a rainy day fund for your nonprofit requires a deliberate approach. In other words, you have to focus on it and work on it intentionally, strategically, and during the day-to-day. Here are some steps to get started:

1.     Define the purpose and size of the fund

Before starting to build your rainy day fund, defining its size is essential. Consider factors such as the size of your organization and the nature of your programs. For example, in an emergency, you might require daily liquidity if you operate a soup kitchen. Or your nonprofit might only need access to capital on a bi-monthly basis. So, consider your need for cash flow and the amount required for your fund.

2.     Create a plan and stick to it.

Creating a plan is crucial to building a successful rainy day fund. Moreover, everyone’s got to get on board—including your board. Start by setting a goal for how much you want to save. Next, develop a plan outlining how much you’ll save each month or quarter. Stick to your plan, even when faced with unexpected expenses or revenue shortfalls. In short, a disciplined savings plan is critical to building a robust rainy day fund.

3.     Identify funding sources

Identifying funding sources is critical to building a rainy day fund. For one, you could consider allocating a portion of your organization’s annual revenue, such as a percentage of donations, to the fund. You can also consider fundraising specifically for the fund, particularly with your biggest major donors. And you can also seek alternative funding sources, such as corporate sponsorships or partnerships.

4.     Keep the fund separate.

As you start raising money for your fund, keeping the rainy day fund separate from your organization’s general operating fund is vital. In other words, you don’t want it used for anything else—even unexpected expenses that arise before you achieve your goal. So, speak to your finance team. They’ll likely ask you to set up a different account to ensure the funds aren’t used for day-to-day expenses.

5.     Review and adjust regularly.

As time progresses, regularly review your rainy day fund to ensure it’s on track to meet its goals. Additionally, regularly assess your nonprofit’s financial risk and adjust your rainy day fund’s size and purpose accordingly. Adjust your savings plan or funding sources based on operational changes in your organization’s financial situation.

Ensuring the long-term of your nonprofit

In conclusion, a rainy day fund is a vital financial tool that every nonprofit organization should use to ensure long-term sustainability. For one, it provides a safety net during economic instability. Also, it allows organizations to continue serving their communities and fulfilling their missions—even when unexpected events arise. Following these steps, your nonprofit can establish a robust and reliable rainy day fund. And doing so allows you to navigate any financial challenges and continue delivering essential services to your community.

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