How Much Money Should Your Nonprofit Be Saving?
In last week’s blog post, we explored Why Your Nonprofit Should Have a Savings Account. If you didn’t get a chance to read it, we highly suggest you start there to understand the benefits of building a savings account for your nonprofit.
We help nonprofit leaders in small to mid-sized organizations build resiliency and long-term sustainability. Many nonprofit leaders deal with resource constraints, high expectations, and demanding multifaceted roles. We believe that building a savings account is one of the best steps to take if you’re looking to improve your organization’s sustainability.
How Much Money Should Your Nonprofit Be Saving Each Month?
In his book, Profit First, Mike Michalowicz suggests a range of savings percentages for businesses based on their total annual revenue. We’ve adapted these recommendations for the nonprofit sector, breaking them down in the table below:
How to Start Saving
If you’re not accustomed to allocating income for savings, making the jump from zero to 5%, or even 10%, can feel daunting. That’s why we’re drawing on Michalowicz's wisdom from the for-profit sector to advise you on how to start saving for your nonprofit.
Michalowicz suggests starting with an allocation so small that “you don’t even feel it.” For example, if you historically put zero income into a savings account, a good place to start is one percent.
Yes, ONE PERCENT. Each month, take the total amount of income that came into the organization, multiply that by 0.01, and you have your monthly savings allocation. For instance, if your organization brought in $500 one month:
$500 x 0.01 = $5
Put $5 into your savings account for that month. What’s the point of $5, you ask? At this stage, the point is to:
Build the habit of allocating money into your savings account
Get used to operating with 1% less money than you are used to
Increase Your Savings Allocations Quarterly
Once you start allocating one percent of your income to savings, your journey to 5% or 10% will be slow and manageable. Each quarter, you will increase your savings allocation by one percent until you reach your percentage goal outlined in the chart above. For example, if you start saving in July 2024, your journey to a 5% monthly savings allocation would look like this:
How Much Should You Strive to Save?
To run a sustainable nonprofit, it’s best to have six months of operating costs set aside at any given time, which means you need about 6-9 months of cash reserves in the bank to weather a financial crisis. This is your “emergency fund.”
Having this buffer allows you to avoid relying on bank loans and ensures that your organization can continue to function through unexpected challenges or emergencies. These costs include essential expenses like utilities, internet, and, of course, salaries. Keep in mind that this is an ideal scenario. Realistically, having anything over a month’s budget set aside will still provide significant benefits, such as peace of mind.
By consistently setting aside funds, you'll be better prepared to handle unexpected expenses, invest in growth opportunities, and ensure the continued success of your organization's mission. Next week, we will be exploring specific nonprofit savings account options. If you’re ready to take the next step and start saving, let us help you find the best fit!
