Operating Reserve Policy
Purpose and Goals
The purpose of this Operating Reserve Policy is to ensure the stability of the mission, programs, employment, and ongoing operations of the Law Center. The Operating Reserve is intended to provide an internal source of funds for situations such as a sudden increase in expenses, one-time unbudgeted expenses, unanticipated loss of funding, or uninsured losses. Operating Reserves are not intended to replace a permanent loss of funds or eliminate an ongoing budget gap. It is the intention of this policy that when Operating Reserves are used, they are replenished within 12 months.
These are the main goals of the reserve:
To enable the Law Center to sustain operations during unanticipated budget shortfalls, delayed payments or funding, or other unforeseeable financial stresses.
To create an internal line of credit to manage cash flow and create financial resilience.
To mitigate the impacts of a sudden, temporary loss of funding on people who rely financially on the Law Center operations for some or all of their income.
Definitions
“Designated Operating Reserves” - A designated fund set aside by action of the General Circle and Board of Directors. The minimum amount to be designated as Operating Reserve will be established in an amount sufficient to maintain ongoing operations and programs for a set period of time. The Operating Reserve serves a dynamic role and will be reviewed and adjusted in response to internal and external changes.
“Target Minimum Amount” - One month of average operating costs, calculated as one-twelfth of the current year’s adopted minimum organizational budget. This amount will be calculated each year after approval of the annual budget, reported to the Board of Directors, and included in regular financial reports.
Accounting for Operating Reserves
The Designated Operating Reserves will be recorded in the financial records (i.e. Quickbooks) as “Designated Operating Reserves”. The Reserves will be funded and available in cash or cash equivalent funds. Operating Reserves will be deposited in a separate, liquid bank account of the Law Center (like checking, savings, money market, etc.).
Funding the Operating Reserves
Starting balance - The Law Center will allocate $50,000 of existing unrestricted assets to seed the reserve fund upon approval of this policy by the General Circle and Board of Directors.
Funding sources - The Operating Reserves will be funded with unrestricted operating funds that are generated from grassroots fundraising revenue (i.e. individual donor campaigns, community memberships), any eligible grants (i.e. general support, capacity-building), and unrestricted carryover surplus from previous years.
Allocation plan to reach the target minimum amount - The Law Center plans to reach the target minimum amount within one year of adopting this policy.
In 2019, the Law Center plans to allocate all revenue raised through the three mini-campaigns to the Operating Reserves.
Additionally, until the target minimum amount is reached, the Financial Circle will prioritize allocating eligible revenue to the Reserves from all eligible sources by considering an allocation at least once per quarter.
Future allocations - Future allocations will be made on an ongoing basis and as needed to replenish the reserve fund. The Financial Circle and General Circle are responsible for proposing allocations in order to meet the requirements of this policy. The General Circle may from time to time direct that a specific source of revenue be set aside for Operating Reserves. Examples may include one-time gifts or bequests, special grants, or special appeals.
Using Operating Reserves
1. Identify appropriate use of reserve funds
Any staff person can bring a proposal to the Financial Circle or General Circle to use reserve funds. The proposal must provide an analysis of the following:
What is the reason for the shortfall or otherwise unfunded expense?
Which of the goals above does using the reserve funds accomplish?
What other sources of funds are available for this expense?
How will the reserve funds be replenished and how long will it take?
2. Relationship to external line of credit
In most cases, the Law Center will deplete the Operating Reserves before drawing on an external line of credit because it will save us money. If a line of credit is available with very favorable terms, the Board of Directors may approve using a line of credit before using reserve funds.
3. Authority to use operating reserves
Up to $50,000 - The Board of Directors, by approving this policy, delegates the authority to use up to $50,000, on a cumulative basis each fiscal year, of Designated Operating Reserves to the Financial Circle and General Circle, as long as the circle notifies and asks for feedback from the Financial Owl of the Board of Directors prior to spending any funds in the Operating Reserves. If the Financial Owl does not provide any feedback within 5 business days, the Circle can move forward with using the reserves.
$50,000 or more - The Financial Circle or General Circle must receive prior approval from the Board of Directors in order to spend $50,000 or more of Operating Reserves cumulatively within a fiscal year.
4. Reporting and monitoring
Any time reserve funds are used, the Financial Circle will report on it to the Board of Directors at their next scheduled meeting. The report will include a description of the analysis and determination of the use of funds and plans for replenishment to the target minimum amount. The Financial Circle is responsible for ensuring that the Designated Operating Reserves are maintained and used only as described in this Policy. Upon approval for the use of Operating Reserve funds, the Financial Circle will maintain records of the use of funds and plan for replenishment. The Financial Circle will provide reports to the Board of Directors at their meetings of progress to restore the Operating Reserves to the target minimum amount.
Periodic Review
This policy will be reviewed every year, at minimum, by the Financial Circle, or sooner if warranted by internal or external events or changes. Changes to the policy will be recommended to the General Circle and Board of Directors for approval.
------------------
Approved by Board: June 6, 2019
Adopted: June 10, 2019
