Financial reserves in government: Part 2

Available cash is critical for both governments and nonprofits to successfully manage assets, new opportunities and timing issues with revenues and expenditures.

Both nonprofits and governments have the need from time to time to make significant changes to programs and services, either to keep pace with the realities of service provision, or to implement significant changes to long term strategy. This Michigan State University Extension article series applies Kate Barr’s points for nonprofits to governments. Part 1 addresses her first two points, repair and replacement of fixed assets, and unexpected external problems.

Thirdly, Barr points out the need for reserves to provide for the nonprofit to respond to long term changes in strategy, for program redesign or expansion. While many would argue that governments should not be constantly looking for opportunities to expand, there are two critical ways that this point applies to governments. Government programs must keep up with changing times. Keeping pace with citizens’ increasing demands for internet based service, for example, often requires significant investment in both hardware and software, or in the development of “apps”. These investments, and the resulting changes to the services provided may in fact save significant amounts of money in the long run through the provision of a vastly different level of service. However, the changes to get to the new, leaner service often require the application of significant dollars to make the change, and reserves can play an important role in making these changes.

The other critical point that comes from Barr’s third point is the need for all organizations to constantly be looking to the future, analyzing trends and societal expectations, and adjusting services and delivery methods to meet those changing societal needs and expectations. In my series of Michigan State University Extension articles on the components of governance, I refer to this aspect of governance as “forward thinking excellence”. Looking to “where the puck is going to be” as Wayne Gretzky is quoted as saying, is critically important to all organizations, whether nonprofit or governmental, to insure their future relevance and viability.

Barr goes on to encourage nonprofits to ask “why”, “when”, and “what if” questions to determine the level of reserves that are necessary for them to hold. You can find additional articles she has written for nonprofits here on the NPQ site, and at the Nonprofits Assistance Fund website. Governments need to ask the same kind of questions. Excellence in fiscal leadership requires nothing less than going beyond simple rule-of-thumb reserve percentages and creating policy for your organization that identifies needs for reserves and making informed decisions about the amount needed.

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