Operating Reserves on Empty for Many Nonprofits

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A lack of cash-on-hand is troubling many nonprofit organizations, putting them in jeopardy just as costs like unemployment taxes are rising. Operating reserves are a necessary foresight in reducing strain on cash flow, reports the Unemployment Services Trust.

As more nonprofits realize the importance of operating reserves, and how they can combat unstable costs like unemployment, the greater equipped they will be

In the ever-changing world of nonprofits, it is general practice to have three months worth of operating costs on reserve to remain solvent during times of dwindling contributions, delays in government funding or unforeseen spikes in expenses. However, escalating state unemployment taxes and unanticipated layoffs have left many nonprofits struggling, reports the Unemployment Services Trust (UST). While the tight pockets of contributors and binding red tape of Uncle Sam are out of the control of the nonprofit, it behooves the organization to set funds aside to be put toward expenses that they are obligated to pay, foreseen or not.

It seems though, that this general practice of keeping the reserve tank fully-funded has gone by the wayside in the wake of the Great Recession. According to a survey performed by the Nonprofit Finance Fund, of the 1,900 nonprofits surveyed, 28% reported having one month or less of operating funds on reserve, and 10% had none. However, the future holds more than doom and gloom for nonprofits, as along with the aforementioned results it was reported that 44% of nonprofits had a surplus at the end of 2010, a 9% increase from the year before and, 35% of organizations reported raising more in 2010 than they had anticipated, while 25% contributed to a reserve fund last year.

One option to help preserve funds, says UST, is to opt out of the state unemployment tax system, which is allowed for 501(c)(3)s by federal law. This can help an organization’s budget in a few ways:

1) As a 501(c)(3), opting out of the state unemployment tax system allows nonprofits to directly reimburse the state dollar-for-dollar for unemployment claims filed against them,     instead of paying the average $2.00 in taxes for every $1.00 in benefits paid out.

2) Direct reimbursing employers are no longer subject to state rates that are socialized to cover the unemployment costs of other employers.

3) They are also not obligated to pay for tax increases that come as a result of hikes in state unemployment, federal borrowing to cover claims or state fund deficits.

Opting out of the state unemployment tax system can be tricky though, in that not all nonprofits are prepared to pay those claims when the need arises. And, even if they do set aside funds in preparation for these costs, claims that are filed against the organization are not always monitored effectively, meaning they could be paying claims they shouldn’t. One strategy in reducing these potential risks is to join an unemployment trust, in which nonprofits are given a rate based on their claims history and quarterly deposits are made into their reserve account. When an organization experiences layoffs, instead of jeopardizing their cash flow, the trust will simply pay the state out of the agency’s account, which will be replenished through future contributions.

Overall, as more nonprofits realize the importance of operating reserves, and how they can combat unstable costs like unemployment, the greater equipped they will be for the future.

Currently, more than 2,000 nonprofit organizations work with UST to lower unemployment costs and opt out of the state unemployment tax system. For more information about the organization, visit http://www.ChooseUST.org or call (888) 249-4788.

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Megan Maulhardt
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