Answer: Every organization should have a reserve fund for contingencies, very much in the same way that every individual should have savings. A contingency fund can be used for emergencies, unplanned expenses, revenue short-falls, cash flow, legal issues, and closures. Reserve funds also can be created for specific projects, as long as the amount of the fund is reasonable for its purposes and the money in the fund is actually spent on those purposes. Reserve funds are typically created over time, through the accumulation of operating surpluses generated from activities such as fundraising, donations, membership fees, and fees for service. The amount of money accumulated in each reserve fund should be substantiated. For example, the rule of thumb for calculating the amount needed in a contingency fund is as follows:
Contingency Reserve Fund = 3 to 6 months of committed/fixed operating expenses OR total costs to shut-down the organization and pay all outstanding liabilities (whichever is the larger amount).
Please keep in mind that non-profits and charities cannot accumulate wealth nor can their budgeting process reflect an intent to generate profit.