Plan B Is Actually Plan A: Building Cash Reserves and Contingency Plans for Nonprofit Resilience
Table of Contents
Introduction: Plan B Is Actually Plan A (Section 1 of 13)
Are You at Risk? A Self-Diagnostic (Section 2 of 13)
Why Nonprofits Don't Build Reserves — and Why That Has to Change (Section 3 of 13)
Definitions: Reserves, Restricted Funds, and the Difference That Matters (Section 4 of 13)
How Much Is Enough? A Tiered Framework (Section 5 of 13)
The Cash Reserve Policy Your Board Must Adopt (Section 6 of 13)
Who Is Responsible? Assigning Ownership (Section 7 of 13)
Where and How to Hold Reserves Safely (Section 8 of 13)
Contingency Planning: From Checklist to Living Strategy (Section 9 of 13)
When the Crisis Arrives: A Real Story (Section 10 of 13)
The Fundraising Path: Building and Replenishing Reserves (Section 11 of 13)
Five Action Steps to Take This Week (Section 12 of 13)
Conclusion: The Seatbelt Argument (Section 13 of 13)
Executive Summary
Most nonprofits do not have adequate cash reserves. Year after year, sector surveys confirm the same picture: the majority of organizations hold less than three months of operating expenses in reserve, and a meaningful share hold less than thirty days. That is not a financial strategy. It is a survival posture — and it breaks down the moment a major funder delays payment, a government contract is canceled, or demand for services spikes faster than revenue.
The evidence for why this matters has never been clearer. In the first half of 2025, one in three US nonprofits that serve communities experienced a disruption in government funding. Of those affected, 29% had already reduced staff and 21% were serving fewer people within months of the disruption. The organizations that absorbed those shocks without cutting programs were not the luckiest ones. They were the ones that had done the work of building financial resilience before the crisis arrived.
This white paper covers the full picture: why nonprofits fail to build reserves despite knowing they should, how much to hold and in what form, the board policy required to govern reserves properly, where to hold the funds safely and why a separate bank account matters even when fund accounting is in place, how to design a contingency plan that functions as a living strategy rather than a shelf document, how to fundraise for reserves as a campaign in its own right, and critically — how to replenish reserves after they have been drawn down. It also tells the story of one organization whose reserves enabled it to take decisive action when others could not — and what that speed of action was worth.
Building reserves is not Plan B. It is Plan A. Everything else depends on it.
Section 1 of 13 — Introduction: Plan B Is Actually Plan A
There is a persistent and damaging myth in the nonprofit sector: that reserves are a luxury. That money held in reserve is money not going to programs. That donors give to change lives, not to build cushions. That a well-run organization should be able to live on what it raises and spend what it receives.
This myth kills organizations.
The purpose of a cash reserve is not to hoard resources. It is to ensure that the organization can continue delivering on its mission when the inevitable disruption arrives — a late grant payment, a canceled contract, an unexpected facility expense, a spike in demand that outpaces revenue, or a wholesale shift in the funding environment that gives the organization a sixty day’s notice and no runway to respond.
Kate Barr, longtime executive director of Propel Nonprofits (formerly the Nonprofits Assistance Fund) and one of the most credible practitioners in nonprofit financial management, put it plainly: "It is absolutely true that every nonprofit needs to have adequate cash balances available to support the timing of payroll and other expenses, as well as to pay for unanticipated costs or increases. It's a myth, however, that a single standard applies for all nonprofits."
Barr's second point is as important as her first. There is no universal reserve target that applies to every organization. The right amount depends on revenue concentration, the volatility of funding sources, the organization's fixed cost structure, and the depth of its relationship with donors and funders who could bridge a gap. What is universal is the need to have a number, a policy, and a plan — and to be building toward them consistently.
That is what this white paper is about. It begins with the honest question every executive director should be asking.
Section 2 of 13 — Are You at Risk? A Self-Diagnostic
Before turning to the how, it is worth establishing the why — personally and organizationally. The following questions are not rhetorical. If you answer yes to one or more, this white paper is for you.
Are you continuously juggling cash flow — moving funds between accounts, delaying vendor payments, or watching receivables anxiously?
Is your organization's credit line nonexistent, unused, or at its limit?
Is your client base growing faster than your revenue?
Have funders asked for stronger program outcomes, but your quality assurance capacity is nonexistent or understaffed?
Do you lack planning funds to pilot a new program before a full launch?
Have you had to pass on a growth opportunity because you lacked the required seed capital?
Is your equipment, facilities, or technology not meeting current demands?
Does a significant share of your revenue come from one funder or one government contract?
Do you have less than three months of operating expenses in accessible, unrestricted cash?
If you answered yes to any of these, you are operating with more financial risk than your mission can afford. The good news is that every one of these conditions is addressable — and the path to addressing them runs through reserves. Before we turn to that path, though, we need to understand why so many organizations never take it.
Section 3 of 13 — Why Nonprofits Don't Build Reserves — and Why That Has to Change
If building reserves is so obviously important, why do most nonprofits fail to do it? The question deserves a direct answer, because the barriers are real — and must be named before they can be overcome.
The starvation cycle. The deepest structural barrier is what Ann Goggins-Gregory and Don Howard of the Bridgespan Group named "the nonprofit starvation cycle" in their landmark essay of the same name. The cycle works like this: funders maintain unrealistic expectations about nonprofit overhead, typically allowing 10 to 15% of grant funds for administrative costs when most organizations need at least 20% for effective program delivery. To compete for funding, nonprofits conform to those expectations — which means they systematically underfund the infrastructure, including reserves, that would make them resilient. Over time, this creates organizations that are programmatically strong and financially fragile.
Clara Miller, founder of the Nonprofit Finance Fund and one of the most rigorous analysts of nonprofit financial structure, has argued for decades that nonprofits are chronically undercapitalized — not because they manage money poorly, but because the funding environment makes capitalization nearly impossible. Her goal for the field, as she described it, is to "create an enterprise that can reliably attract revenue and deliver quality program over the long term." That is a definition of organizational resilience. It requires reserves.
The board culture problem. Many boards treat any year-end surplus as evidence that the organization over-fundraised or under-spent. They push to deploy every available dollar into programs before the fiscal year closes. The impulse is understandable — they are mission-driven people who want to see resources reach beneficiaries. But a board that eliminates surplus before it can be converted to reserves is systematically dismantling the organization's financial foundation. Changing that culture requires executive directors and CFOs to make the case explicitly and repeatedly: a surplus directed to reserves is not money diverted from the mission. It is the investment that protects the mission's continuity.
There is a financial return argument worth making to skeptical board members: organizations with healthy reserves qualify for better terms on lines of credit, loans, and financing for capital needs. A lender evaluating a nonprofit's creditworthiness looks directly at reserve levels as a proxy for financial stability. An organization with six months of reserves in a separate, named account will receive a more favorable rate on a line of credit — and will be approved for a larger one — than an identical organization with thirty days of cash on hand. Reserves are not just insurance against crisis. They are a financial asset that improves the organization's access to capital, lowers its cost of borrowing, and expands its strategic options. That argument tends to land differently with board members who think in financial terms.
The restricted fund trap. Most nonprofit revenue is restricted — designated by funders for specific programs or purposes and legally unavailable for general operating use. An organization can have a million dollars in the bank and thirty days of liquidity if most of that million is restricted. Many executive directors discover this reality for the first time during a cash crisis, when they look at their bank balance and realize they cannot touch most of it. Building unrestricted reserves requires specifically pursuing unrestricted revenue — from individual donors, from general operating grants, from earned income — and protecting it from being absorbed into program budgets.
The discomfort of asking. Many fundraisers are uncomfortable making the case for reserves to donors. It sounds like "we're fine, we just want a cushion" rather than a mission-critical need. The solution is reframing. Reserves are not a cushion. They are the organizational infrastructure that protects every dollar a donor has ever given. An organization without reserves is one crisis away from the programs that donor funded going dark. That is a compelling case — but fundraisers have to believe it before they can make it.
The urgency illusion. In organizations operating under chronic financial stress, every dollar that arrives is immediately needed for something. The idea of setting any of it aside feels impossible when payroll is tight and program expenses are accumulating. This is the cruelest aspect of the starvation cycle: the organizations that most need reserves are the ones least able to build them through normal operations. That is why the reserve campaign — a deliberate fundraising effort targeted at building reserves — exists. It is addressed in Section 10.
The morale cost of not having them. There is a dimension to this problem that financial management literature rarely discusses: staff who work in organizations with chronic financial fragility live with persistent anxiety. They hear about cash flow difficulties. They wonder whether payroll will clear. They update their resumes. Organizations with healthy reserves retain staff better, recruit more confidently, and project the institutional stability that attracts talented people. That is a mission argument, not just a finance argument. Program quality depends on staff quality. Staff quality depends, in part, on whether the organization feels like a place worth committing to.
The context in 2025 makes all of these barriers more urgent to overcome. In the first half of 2025, one in three US nonprofits providing community services experienced a disruption in government funding — cancellations, freezes, delays, and stop-work orders that arrived with little warning and less explanation. Of those hit by cuts, 29% had already reduced staff and 21% were serving fewer people within months of the disruption. Government funding made up 42% of total revenue for the nonprofits most severely affected. The organizations that absorbed those shocks without program cuts were the ones with reserves. The ones that cut were the ones without them. With that context clear, the next step is precision about what reserves actually are — and what they are not.
Section 4 of 13 — Definitions: Reserves, Restricted Funds, and the Difference That Matters
Before a reserve strategy can be built, the terminology must be precise — because confusing these terms leads to financial management errors that are sometimes serious and always costly.
Operating reserves are unrestricted funds set aside by the organization's board and management to provide a financial cushion against unexpected events, income losses, and large unbudgeted expenses. They are not allocated to any specific program or purpose. The board and management can use them as needed, subject to the reserve policy described in Section 6.
Restricted funds are grants and contributions received for specific programs or projects, governed by a grant agreement or donor instruction. They are legally unavailable for any other purpose. An organization cannot use a restricted program grant to cover payroll during a cash flow gap — even temporarily, even with the intent to replace the funds. Doing so is a compliance violation with potentially serious legal and reputational consequences. The presence of restricted funds in a bank account does not indicate organizational liquidity.
Working capital refers to the funds available for day-to-day operations — the difference between current assets and current liabilities. Operating reserves are a component of working capital, but working capital also includes accounts receivable, pledges, and short-term investments.
The line of credit question. Some executive directors maintain a bank line of credit as their de facto reserve fund. This is a dangerous substitution. A line of credit is debt. It must be repaid with interest. Banks can reduce or call a line of credit precisely when an organization's financial stress is most visible — which is exactly when the organization needs it most. A line of credit is a useful complement to reserves for managing short-term cash flow timing gaps. It is not a substitute for the organizational cushion that unrestricted reserves provide.
Reserves versus endowments. Reserves are liquid, operational, and governed by board policy for near-term use. Endowments are permanent funds whose principal is preserved and whose investment income supports organizational operations in perpetuity. They are governed by donor restrictions and investment policies, and they are not accessible for operating needs except in extraordinary circumstances. Organizations that count their endowment balance as their reserve fund are confusing two entirely different instruments.
When restricted funds are all you have: the funder conversation. Despite the legal constraints on restricted funds, many executive directors discover during a genuine crisis that restricted grants are the only significant cash they hold — and that their organization cannot survive without flexibility. The instinct is to say nothing and hope the problem resolves. The better instinct is to call the funder directly, early, and honestly.
Most funders are more flexible than their grant agreements suggest — particularly when the grantee has a strong relationship with the program officer, a credible explanation of what happened, and a specific request rather than a vague appeal for help. The conversation that works sounds like this: "We have experienced an unexpected disruption in our operating revenue. We are not in a position to complete the deliverables of this grant on the original timeline. I want to talk with you about two options: a no-cost extension, or a partial redirection of unspent funds to cover a defined operating gap while we stabilize. We have a written plan for both." Funders who receive that call in month two of a crisis respond very differently than funders who receive it in month six, when options have narrowed and the organization is visibly failing.
The lesson: restricted funds cannot substitute for reserves, and no funder conversation can replace a reserve fund. But the funder conversation — initiated early, conducted honestly, with a specific proposal — can bridge a gap that reserves alone cannot cover. The two strategies work together.
With these definitions in place, the next question is how much to hold — and the answer is more specific than most executive directors realize.
Section 5 of 13 — How Much Is Enough? A Tiered Framework
There is no single correct answer to how much an organization should hold in reserves. The right number depends on revenue concentration, cost structure, and the volatility of the organization's funding environment. What the field does provide is a clear framework for thinking about it.
The minimum threshold: three months. There is uniform agreement in the field that organizations with less than three months of operating expenses in reserve are in a weakened financial position. Three months is not a target — it is the floor below which an organization is considered financially vulnerable. Georgetown University's Center for Public and Nonprofit Leadership describes organizations at this level as having limited capacity to respond to financial shocks.
The healthy standard: six to twelve months. Stronger nonprofit organizations typically have formal operating reserve policies with goals of six months on the low end to twelve months on the high end. Six months means the organization can absorb a major revenue disruption — a canceled grant, a delayed government payment, a failed fundraiser — without cutting programs or staff, and has time to develop a response strategy. Twelve months means the organization has genuine strategic flexibility: the ability to take risks, invest in growth, and navigate transitions from a position of stability rather than crisis.
The resilient target: one to three years. Organizations with highly volatile or government-dependent revenue, organizations in political or regulatory environments where funding can shift rapidly, and larger organizations with complex fixed cost structures should aim for reserves well above twelve months. The BBB Wise Giving Alliance's Give.org standards allow nonprofits to hold up to three years of operating expenses in reserve — the ceiling beyond which reserve accumulation raises accountability questions with donors and watchdog organizations.
Calibrating for revenue concentration. The right target rises with revenue concentration. An organization that receives 60% of its revenue from a single government contract is more exposed than one with ten diversified revenue streams. A useful rule: for every 10% of revenue concentrated in a single source, add one month to your reserve target. An organization with 60% concentration in one funder should target at least a six-month reserve regardless of other factors.
Calibrating for fixed costs. The single most important number to know is your monthly fixed costs — payroll, rent, insurance, and other obligations that do not flex with program volume. That number is the denominator for your reserve calculation. An organization with $200,000 in monthly fixed costs needs $1.2 million to hold six months of reserves. An organization with $50,000 in monthly fixed costs needs $300,000. Know your number before you set your target.
Once the target is set, it needs a formal home — a board-adopted policy that governs how the reserve is built, held, accessed, and replenished.
Section 6 of 13 — The Cash Reserve Policy Your Board Must Adopt
A reserve fund without a board-adopted policy is an account balance, not a strategy. The policy is what makes reserves usable — it defines when they can be accessed, how much can be drawn at once, who authorizes the drawdown, and how the fund is replenished after use. Without a policy, a reserve fund is vulnerable to informal erosion: the month the payroll is tight, the quarter the gala underperforms, the year the CFO retires and no one remembers why the account exists.
The board should adopt a reserve policy on the recommendation of the CEO and CFO. The policy should address five elements:
1. The reserve target. State the specific amount — expressed as months of operating expenses — that the organization commits to maintaining. This number should be derived from the tiered framework in Section 5 and reviewed annually as the organization's budget and risk profile change.
2. Permitted uses. Define the circumstances that justify drawing on reserves. These should be specific and limited: a shortfall in expected revenue exceeding a defined threshold, an unexpected major expense, a cash flow gap caused by delayed receivables, or a declared organizational emergency. Vague language — "when needed" or "at the board's discretion" — makes the reserve an informal slush fund rather than a governed instrument.
3. Authorization process. Specify who can authorize a reserve drawdown. Typically this requires approval from both the CEO and the board treasurer, with notification to the full board. For larger drawdowns — say, more than 25% of the reserve balance — full board approval should be required.
4. Replenishment plan. Every reserve drawdown should trigger an automatic replenishment obligation. Define the timeline — typically 12 to 24 months — and the mechanism: a percentage of annual surplus directed to the reserve, a specific budget line item, or a targeted fundraising effort. A reserve that is drawn down and not replenished is a diminishing asset. Section 10 covers replenishment in detail.
5. Restrictions and limitations. Specify what the reserves cannot be used for — covering a long-term or permanent income shortfall, for example, or funding program expansion. Reserves are for survival and bridging, not for growth. Using them for growth depletes the cushion without the revenue diversification that would allow replenishment.
The reserve policy belongs in the organization's financial policies and procedures manual, reviewed by the auditor annually, and approved by the full board. It is a governance document — and it signals to donors, funders, and watchdog organizations that the organization manages its finances with discipline and foresight.
The auditor's role. When an organization's annual audit includes a review of the reserve policy, the auditor is looking for three things: documentation that the policy exists and has been board-approved, evidence that any drawdowns during the year were authorized per the policy's process, and a written replenishment plan for any unreplaced balance. Organizations that have never maintained a reserve policy often discover during their first post-policy audit that the auditor's questions are clarifying rather than threatening — the auditor is not looking for problems, but for evidence of governance discipline. What auditors flag as concerning is not the existence of drawdowns but the absence of documentation: an unexplained reduction in reserve balance with no board authorization on record and no replenishment plan in place. The audit process, in other words, enforces the policy. That enforcement is a feature, not a burden.
Where to find a sample policy. Propel Nonprofits (propelnonprofits.org/resources) publishes two sample operating reserve policies with explanatory guidance — one for organizations in early reserve-building and one for more established programs. They are free, well-constructed, and adaptable. The National Council of Nonprofits (councilofnonprofits.org) also provides reserve policy guidance and sample language. Either is a sound starting point for a board that is drafting a policy for the first time.
With the policy adopted, the next question is: who is actually responsible for managing, monitoring, and reporting on the reserve fund?
Section 7 of 13 — Who Is Responsible? Assigning Ownership
A reserve policy without named owners is an aspiration, not a plan. One of the most common reasons reserves are not built — or are quietly eroded after a drawdown — is that no one is specifically accountable for monitoring them, reporting on them, or sounding the alarm when they fall below target. In a well-governed organization, five roles share responsibility for the reserve fund, each distinct and each non-delegable.
The CEO owns the strategic commitment. It is the chief executive who makes the case to the board, sets the organizational culture around financial resilience, and ensures that reserve-building is treated as a mission-critical priority rather than a back-office finance task. If the CEO does not champion reserves — explicitly, publicly, and repeatedly — they do not get built, regardless of what the policy document says. The CEO also owns the reserve conversation with major donors and funders: the case for why this organization is building reserves, what those reserves protect, and why investing in organizational resilience is an investment in the mission.
The CFO or Director of Finance owns operational management. They calculate the current reserve position, monitor it monthly against the policy target, manage the banking and investment strategy described in Section 8, and produce the board reports that make reserve progress visible to governance. In organizations without a dedicated CFO — which describes many small and midsize nonprofits — this responsibility falls to the most senior financial staff member, often a controller or a part-time bookkeeper. Where that capacity gap exists, the executive director must compensate with closer personal oversight of the reserve position. The gap does not eliminate the responsibility. It transfers it upward.
The board treasurer owns governance oversight. The treasurer reviews the reserve position at every board meeting, ensures the reserve policy is being followed, authorizes drawdowns per the policy's process, and leads the replenishment conversation after any drawdown occurs. In many organizations the treasurer is the only board member who reads the financial statements with care — which makes their engagement with reserve policy not optional but load-bearing. A treasurer who treats reserve monitoring as routine housekeeping rather than strategic oversight is a governance risk.
The full board owns the policy itself. The board adopts the reserve policy, sets the target, approves significant drawdowns, and holds the CEO and CFO accountable for building toward the target. This is a board-level governance responsibility — not a staff function, not a finance committee task, but a full-board commitment. The reserve policy should appear on the consent agenda at annual board meetings for reaffirmation, and the reserve position should be reported at every regular board meeting as a standing agenda item alongside revenue and expense.
The development director owns the fundraising path. Building unrestricted revenue, making the case to donors for capacity gifts, and leading any cash reserve campaign are development functions. The development director should know the current reserve position at all times and be able to articulate the organization's reserve-building goal in a donor cultivation conversation. A development director who does not know the reserve target is a development director who cannot make the full case for unrestricted giving — and that case, made well, is among the most powerful arguments in the fundraising repertoire.
With these roles assigned and the policy in place, the operational question follows: where do the funds actually live?
Section 8 of 13 — Where and How to Hold Reserves Safely
Where reserves are held is as important as how much is held. An organization that keeps its full reserve balance in a standard checking account is exposed to three risks: the funds are too accessible and too easily absorbed into operations, they earn nothing against inflation, and they may exceed FDIC insurance limits. This section addresses all three — and answers a question that surprises many nonprofit financial managers.
Is a designated fund in the accounting system sufficient?
Many nonprofits use fund accounting software — Sage Intacct, QuickBooks Nonprofit, Blackbaud Financial Edge — and maintain a "Board Designated Reserve Fund" as a separate fund on their books. This is good accounting practice. It is not sufficient as a reserve strategy.
A fund designation in the accounting system is a bookkeeping label. It does not create a physical barrier between reserve funds and operating cash. When the operating account runs low and someone needs to cover payroll, the reserve balance is visible and accessible — and without a separate bank account, the psychological and procedural barriers to informal drawdowns are weak. Finance staff under pressure make pragmatic decisions. A fund designation in the ledger does not stop that from happening the way a separate bank account, with its own authorization requirements and its own statement, does.
The operational separation principle is this: reserve funds must live in a separate, named bank account — not commingled with operating accounts. The separation is not primarily an accounting practice. It is a governance practice. A separate account signals to auditors, funders, and board members that the organization treats its reserves as a governed asset. It creates a friction that makes informal drawdowns harder. And it forces the authorization process specified in the reserve policy to actually happen — because accessing the account requires a deliberate act, not a simple transfer.
The FDIC coverage issue. Standard nonprofit bank accounts carry FDIC coverage up to $250,000 per institution. For organizations with reserves exceeding that threshold, this creates real exposure. The practical solutions are:
Multiple accounts at different institutions. Spreading reserves across two or three FDIC-insured banks keeps each balance below the coverage limit. This approach works but creates bookkeeping complexity and limits visibility into the total reserve position.
Insured Cash Sweep (ICS) accounts. Many banks offer sweep programs that automatically distribute funds across a network of FDIC-insured institutions while presenting as a single account. These programs can provide FDIC coverage well above the standard limit — some up to $5 million — without requiring the organization to manage multiple bank relationships.
Brokered CD accounts. A brokerage account holding certificates of deposit from multiple banks, each below the $250,000 FDIC limit, provides full insurance coverage on a large reserve balance while earning higher returns than a standard savings account. CDs are less liquid than money market accounts — funds are locked for a defined term — so an organization using this approach should ladder maturities to ensure a portion of the reserve is accessible at all times.
Treasury Bills. US Treasury Bills are government-backed, highly liquid, and as of late 2025 offering returns between 3.75% and 5%. A Treasury ladder — Bills maturing every quarter — provides predictable liquidity while earning meaningfully more than a savings account. For organizations with reserves above $500,000, Treasury Bills are worth considering as a component of the reserve holding strategy.
The investment policy. Organizations with reserves above $500,000 should have a board-adopted investment policy that governs how reserve funds are managed — what instruments are permitted, what risk levels are acceptable, who manages the funds, and how performance is reported to the board. Without an investment policy, a well-intentioned treasurer can inadvertently expose reserve funds to inappropriate risk, or miss opportunities to earn returns that offset inflation.
Section 9 of 13 — Contingency Planning: From Checklist to Living Strategy
A contingency plan is not a crisis manual that sits in a binder until disaster strikes. It is a living strategic instrument — a set of pre-made decisions that allow an organization to act decisively when a disruption occurs, rather than convening emergency meetings while programs are shutting down and staff are updating their resumes.
The distinction matters because the value of a contingency plan is entirely in its speed. When the crisis arrives, the organization that has thought through its response in advance moves in days. The organization that has not moves in months — if it moves at all.
In late January 2025, fifty nonprofits that had just received a federal demonstration grant were preparing for a two-day orientation. Twenty-one minutes before the scheduled start, they received an email canceling the grant entirely. Not delayed — canceled. The organizations that had contingency plans for funding loss activated them immediately: they knew which programs to protect, which expenses to defer, which donors to call, and what their communication to staff and clients would say. The organizations that had no plan spent those days in paralysis.
That is what contingency planning actually does. It does not prevent the crisis. It determines how fast you can respond to it.
Step 1: Identify the factors most critical to your success — and most vulnerable to disruption.
Begin with your revenue. For each significant funding source, ask: what is the probability that this source is disrupted in the next 12 to 36 months? What would trigger that disruption? For government contracts, the trigger might be a policy change, an administration change, a budget freeze, or a program elimination. For foundation grants, it might be a strategic pivot, a leadership change, or a sector-wide shift in priorities. For individual donors, it might be an economic downturn, a major donor's death, or a reputational event.
Then move beyond revenue to operational factors: the loss of a key staff member, a facility problem that forces relocation, a technology failure, a public health event that disrupts in-person programming.
The goal is not to predict every possible disruption. It is to identify the disruptions that would most significantly affect the organization's ability to pursue its mission — and to focus planning energy on those.
Step 2: Determine possible outcomes and their implications for operations, finances, and programs.
For each identified risk, map the range of possible outcomes. A government funding disruption might mean a 10% reduction, a 50% reduction, or a complete elimination. Each scenario has different implications for staffing, programs, and cash flow. Work through them systematically: what would a 10% revenue reduction require? A 30% reduction? A 50% reduction? What programs could continue, what would have to be reduced, and what would have to be suspended?
This exercise is uncomfortable. It is supposed to be. The discomfort of a planning conversation is far less damaging than the discomfort of making those decisions in real time, under pressure, with no pre-made framework.
Step 3: Identify the best response path for each scenario.
For each outcome scenario, determine the organization's response: what programs are protected regardless of the severity of the disruption; what programs can be reduced without eliminating the organization's value to its community; what administrative costs can be deferred or eliminated without long-term damage; and what revenue-generating or fundraising actions can be accelerated.
This is where the connection between contingency planning and fundraising becomes explicit. A well-designed contingency plan identifies, in advance, which donors and funders would be approached in a crisis, what the ask would be, and who on the board or staff would make it. Major donors and institutional funders who trust the organization's management are far more likely to respond to an emergency appeal from an organization that can say "here is our plan, here is what we need, here is how we will use it" than from one that calls with only panic and no roadmap.
Step 4: Codify the trigger thresholds.
The contingency plan is most useful when it specifies the conditions that activate each response level. A practical framework uses revenue decline as the primary trigger:
Level 1 (revenue falls 10%): Implement a spending freeze on discretionary items — travel, conferences, and non-essential supplies. Accelerate collection of outstanding receivables. Initiate donor outreach to identify bridging support. No program cuts, no staff reductions.
Level 2 (revenue falls 20–30%): Reduce administrative costs, defer non-critical hires, eliminate or defer capital expenditures. Consider program-by-program cost-benefit review. Begin conversations with major donors and funders about emergency support. Draw modestly on reserves if needed.
Level 3 (revenue falls more than 30%): Convene board emergency session. Implement program prioritization decisions made in advance. Consider staff restructuring. Draw more significantly on reserves. Execute the emergency fundraising protocol. Evaluate partnership or merger options if the disruption appears long-term.
This framework should be reviewed annually, updated when the organization's revenue mix changes significantly, and presented to the full board — not just the finance committee — so that every board member understands what the triggers are and what they are authorizing when those triggers are reached.
Step 5: Monitor leading indicators and implement the right scenario.
Contingency plans are only useful if the organization is watching for the conditions that would activate them. Designate a set of leading indicators to monitor: the status of pending government contract renewals, the investment performance of major foundation funders, economic indicators that predict individual giving patterns, and the organization's own monthly cash position against the reserve target. Assign someone — the CFO, the CEO, or the finance committee chair — to review these indicators monthly and flag changes that approach trigger thresholds.
The donor confidence argument. A well-documented contingency plan is a fundraising asset, not just a risk management tool. Major donors and institutional funders increasingly ask whether organizations have thought carefully about the risks to their mission and have a plan for navigating them. An organization that can say "here is our contingency plan for a 20% revenue reduction — here is what we would protect, here is what we would defer, and here is how we would communicate with you" is making a more credible case for a major investment than an organization that cannot answer that question. Organizational resilience is a donor confidence signal. Build the plan. Share it with your major donors. Let it do double duty.
The next section shows exactly what that looks like in practice — through the story of one organization that had both the reserves and the plan when the moment arrived.
Section 10 of 13 — When the Crisis Arrives: A Real Story
Let's call them “A Stitch in Time, Inc.” — because the name captures exactly what their story is about.
A Stitch in Time was an $800,000 annual budget nonprofit, fifteen years old, well-regarded in its community, and — unusual for an organization of its size — holding a reserve fund equal to its full annual budget. That reserve had been built deliberately, over years, through a combination of surplus accumulation, unrestricted major gifts, and a cash reserve campaign that the board and development staff had championed as a strategic priority.
Then the political environment shifted. The government began a systematic effort to de-fund and eliminate organizations in the sector A Stitch in Time served. Similar organizations were being defunded with little warning. The leadership saw it coming — not with certainty, but with enough signal to act.
Because they had reserves, they could act fast.
A Stitch in Time immediately retained a government relations expert — not a lobbyist, but a skilled relationship-builder and strategist with deep connections across the relevant government agencies and legislative offices. The expert's mandate was specific: build the case, quickly and compellingly, for why A Stitch in Time and the organizations it worked with should survive the purge. Network aggressively. Identify the decision-makers who needed to understand what these organizations did and why eliminating them would cause damage that could not easily be repaired.
The work was expensive. It required months of focused effort and sustained relationships. Without the reserve fund, A Stitch in Time could not have funded it. Without that work, the organization would very likely have been eliminated along with many others in its sector that were.
A Stitch in Time survived while others like it did not.
The lesson is not simply "have reserves." The lesson is that reserves buy speed — and in a crisis, speed is everything. The organizations that responded slowly did so not because their leaders were less capable, but because their financial position gave them no room to act. They spent the first weeks and months of the crisis managing their immediate financial survival rather than managing the threat itself.
That is what a reserve fund equal to one year of operating expenses actually buys: the ability to deploy resources immediately, strategically, and without panic. Not every crisis is political. Not every reserve drawdown goes to a government relations expert. But every organization facing a crisis needs the same thing A Stitch in Time had: the time and financial flexibility to think, to act, and to fight for its mission before it is too late.
Section 11 of 13 — The Fundraising Path: Building and Replenishing Reserves
Understanding why reserves matter and how much to hold is necessary but not sufficient. The practical question is: how does an organization actually build them — and how does it rebuild them after they have been drawn down? Most guides answer the first question and ignore the second. This section addresses both.
Building Reserves: Three Steps
Step 1: Accumulate surplus and direct it deliberately to reserves.
The most straightforward path to reserves is operational: budget for a surplus, achieve it, and direct it to the reserve account rather than deploying it back into programs before the fiscal year ends.
This requires a genuine cultural shift in most organizations. The board must agree — explicitly, in policy — that surplus is not a problem to be solved by spending but an asset to be stewarded by saving. The CFO must build reserve contributions into the annual budget as a line item, not a residual. And the development office must communicate to donors and funders that a surplus is evidence of sound management, not an indication that the organization has more money than it needs.
Fund depreciation expenses explicitly. Every major piece of equipment, every vehicle, every technology system has a replacement cost that will eventually come due. Organizations that do not fund depreciation within their annual budgets are accumulating hidden liabilities. Those liabilities materialize as crises — the HVAC system fails, the server crashes, the van breaks down — at the worst possible moments. A reserve strategy that accounts for depreciation is a reserve strategy that actually holds.
Step 2: Pursue unrestricted revenue aggressively.
Reserves can only be built from unrestricted revenue. Every restricted grant, every contract payment, every fee-for-service dollar is spoken for before it arrives. The path to reserves runs through unrestricted individual giving, general operating grants, and earned income that is not tied to specific program deliverables.
This means the development office must have an explicit annual goal for unrestricted revenue — not just total revenue. Major donors are the most reliable source of unrestricted gifts. Individual donors who give without restrictions are more valuable to organizational resilience than restricted program grants of equivalent size. Make the case explicitly in cultivation and solicitation: "Your gift, without restrictions, gives us the flexibility to respond to what our community needs when they need it. That flexibility is what makes everything else we do possible."
Earned income deserves specific attention here. For nonprofits with fee-for-service potential — training and consulting programs, publications, facility rentals, licensing of materials, or specialized services that the market will pay for — earned income is one of the most reliable and dignified paths to unrestricted surplus. Unlike philanthropic revenue, earned income is not subject to donor restrictions, grant terms, or the starvation cycle. It arrives as unrestricted cash that the organization controls completely. Organizations that have invested in earned income streams — even modest ones — consistently report that those streams provide the financial floor from which reserves can actually be built. If your organization has a program, a methodology, or an expertise that another organization or the public would pay for, that is a reserve-building asset worth developing deliberately.
Step 3: Launch a Cash Reserve and Capacity Campaign.
For organizations that cannot build adequate reserves through surplus accumulation and unrestricted revenue alone, a time-limited fundraising campaign specifically targeted at building reserves and organizational capacity is the most powerful tool available.
A Cash Reserve and Capacity Campaign is a major gift campaign in all but name. It runs 36 to 60 months. It seeks special gifts, challenge gifts, and major gifts from the organization's most loyal donors and funders, as well as from value-aligned prospects identified through advanced prospect research. Gifts are secured through personal meetings, presentations, and targeted appeals. The campaign goal is set based on the organization's reserve target and capacity-building needs — not on what seems modest or safe.
The case for support requires careful construction. Calling it "A Campaign for Reserve Funds" will not move donors. The case must connect reserves to mission: what will the organization be able to do, protect, and pursue once its financial foundation is secure? What programs are currently impossible because the organization cannot absorb the startup risk? What opportunities are being passed over because there is no seed capital? What staff positions cannot be filled because the cash position does not support the hire? The answers to those questions are the case for the campaign.
The Kendeda Fund ran a reserve-building initiative with 37 grantee partners, focused on organizations with budgets under $5 million that had not yet achieved six months of reserves. Their experience confirmed what practitioners know: major funders increasingly understand that organizations without reserves cannot sustain the programs those funders are supporting. When asked clearly and compellingly, donors and institutional funders respond to the reserve case.
Replenishing Depleted Reserves: Three Phases
Drawing on reserves is not a failure. It is what reserves are for. The failure is drawing on them and not rebuilding them — which is what happens in most organizations because the replenishment plan was vague, underfunded, or never made it past the policy document.
Replenishment happens in three phases, and all three require active management.
Phase 1: Stabilize (months 1–3 after a drawdown). The immediate priority after drawing on reserves is stopping the conditions that required the drawdown in the first place. This means securing the replacement revenue — a new grant, an emergency appeal, a bridge loan if necessary — or implementing the cost reductions that eliminate the ongoing gap. Until the revenue picture is stabilized, drawing further on reserves is borrowing against an asset that is already depleted. Stabilization comes first.
During Phase 1, the question of donor and funder communication must also be addressed — and it is a genuine strategic choice. Some organizations treat a reserve drawdown as confidential, fearing that transparency will signal weakness and trigger donor flight. The evidence points the other direction. Major donors and institutional funders who have an existing relationship with the organization, and who receive an honest, early communication about the drawdown, its cause, and the replenishment plan, respond far more generously than donors who learn about the problem from a third party or from a delayed and defensive disclosure. The communication that works is specific and forward-looking: "We drew on our reserve fund in response to [specific disruption]. Our current reserve balance is [X]. Our replenishment plan is [Y], on a timeline of [Z]. We are reaching out to our closest supporters to discuss how you might be able to help." That message signals organizational maturity, not distress. Donors who trust the leadership and believe in the mission are more likely to bridge the gap when they are treated as partners in the solution rather than kept in the dark until the situation resolves itself.
Phase 2: Restore (months 4–24). Once the organization is financially stable, the reserve replenishment plan activates. The reserve policy should specify a replenishment percentage: typically 10 to 20% of annual surplus directed to the reserve account until the target balance is restored. This means that during the replenishment period, surplus dollars are split — some to reserves, some available for other uses — rather than all being deployed into programs. The CFO tracks progress against the replenishment target and reports to the board quarterly. The timeline should be specific: "We will restore the reserve to its target level within 18 months" is a governance commitment, not a hope.
Phase 3: Rebuild beyond the prior target (months 24+). A significant drawdown is a signal that the reserve target was too low for the organization's risk profile. After the reserve is restored, the board should revisit the tiered framework in Section 5 and determine whether the target should be raised. An organization that needed to draw on its reserve fund to survive a disruption has learned something about its vulnerability that the prior target did not account for. Use that lesson. Set a higher target. Build toward it deliberately through a combination of operating surplus and targeted fundraising. A Stitch in Time built its reserve to equal its annual budget over many years of intentional effort. That target served it well when the crisis arrived.
Section 12 of 13 — Five Action Steps to Take This Week
1. Calculate your current reserve position. Add up your unrestricted, accessible cash — excluding restricted fund balances, outstanding receivables, and any funds committed to specific near-term expenses. Divide by your monthly fixed costs. That number is your current reserve in months. Write it down. It is the starting point for everything else.
2. Identify your reserve target. Using the tiered framework in Section 5, determine the reserve level appropriate for your organization's revenue concentration and cost structure. The gap between your current position and your target is your reserve-building goal.
3. Review your current reserve policy — or acknowledge that you do not have one. If your organization has a written, board-adopted reserve policy, review it against the five elements in Section 6. If it is outdated or inadequate, schedule a board discussion. If it does not exist, download the sample policies from Propel Nonprofits at propelnonprofits.org/resources and use them as your starting point. Make drafting a policy a 90-day priority.
4. Confirm that your reserves are in a separate bank account. If reserve funds are currently designated only in your accounting system, not physically separated in their own account, schedule a conversation with your CFO and banker this week. A fund designation in the ledger is not a governed reserve. A separate named account is.
5. Draft your Level 1 contingency response. Write one page describing what your organization would do if revenue fell 10% in the next 12 months. What spending would be frozen? What receivables would be accelerated? Which donors would you call? Having that page written — even imperfectly — changes how you think about your current financial position and what you need to protect.
Section 13 of 13 — Conclusion: The Seatbelt Argument
Nobody wears a seatbelt because they plan to crash. They wear it because crashes happen — unpredictably, suddenly, and without regard for how carefully the driver was paying attention.
Cash reserves work the same way. They are not an admission that the organization expects financial failure. They are the acknowledgment that disruptions happen — to good organizations, well-managed and mission-aligned — and that the organizations that survive them are the ones that prepared before they arrived.
A Stitch in Time survived its crisis because it had built its reserves before the political environment shifted, not after. The organizations that did not survive were not less worthy. They were less prepared. That distinction is within every organization's control.
The organizations that made it through the government funding disruptions of 2025 more broadly were not the ones with the best programs. They were the ones with the reserves to absorb the shock, the contingency plans to respond quickly, and the financial relationships to mobilize support while others were still assessing the damage.
That is the seatbelt argument. Wear it before you need it.
The path is clear: know your number, adopt a policy, hold the funds safely in a separate account, plan for disruptions before they arrive, raise money for your reserves with the same urgency and discipline you bring to every other mission-critical need, and when reserves are drawn down — replenish them deliberately, on a timeline, to a target that reflects what you have learned. It is not glamorous work. It is the work that keeps everything else possible.
A Note on Use
This white paper is offered freely for educational purposes. Please share it with executive directors, CFOs, board members, and development staff who may find it useful — provided the author's byline remains intact: By Laurence A. Pagnoni, MPA. Reproduction in publications, training programs, or institutional materials requires attribution. To request permission or discuss reprint rights, please reach out through the contact page.
Are your cash reserves at the level they should be? What has your experience been building reserves or designing contingency plans? Share your thoughts in the comments section of the website.
