Dear Governance Matters,
I recently joined the board of a local public charity. The organization has a sizeable amount of cash reserves, but has not developed policies to determine how much this reserve should be or how to invest it. Do you have any guidance we should consider in formulating our reserve policies?

Randy

Dear Randy,
"Sizeable" means very different things for different organizations. Investing reserves depends largely on your financial and programmatic goals, but other factors must be taken into account as well, such as:

• the amount of the reserves, especially as a percentage of the budget
• whether any reserves are restricted
• what financial needs influence the spending rate
• the time frame in which the organization might need to use reserves
• the time frame in which the funds are to be invested
• the organization's tolerance for risk

Overall, we recommend a reserve that covers 3 months of operating expenses, but the factors above need to be considered in order to set an amount that is reasonable for a particular organization. Basically, the answer depends upon the details.

Russ Pomeranz, Manager,
Fiscal Management Associates