This is a difficult question, as all nonprofits are different.
For most people, it is common sense to think of having a savings account, or to have money set aside for emergencies. Likewise, most nonprofits need a reserve fund, as well as a separate endowment account that money cannot be drained from at will.
Though the IRS regulations are very clear in stating that profits may not be distributed to board members (as corporate profits are to shareholders), the regulation does not bar nonprofits from generating profits. In fact, any surpluses i.e. (“profits”) are needed by all nonprofits to even out their cash flows.
The obvious way to build a reserve fund is to operate with an annual surplus, generating net revenue that can then be added to reserves. A healthy reserve fund will give a nonprofit the flexibility to either develop new programs or quickly respond to sudden emergencies that constantly seem to appear in this arena. However, The National Charities Information Bureau suggests that charities should not have more than two years’ expenses in reserve.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.
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