Even historically successful nonprofit organizations may face financial risks in the months and years ahead. For instance, your nonprofit might begin losing significant "market share" to other organizations. Similarly, the loss of a major supporter or a key staff member could have dire results.

It makes good practical sense to establish a reserve fund that can sustain you through the down times. This will enable your nonprofit to continue functioning smoothly when economic difficulties arise.

If your nonprofit does not have a reserve policy, make this one of your top priorities. Here are four basic steps for implementing a reserve policy.

1. Identify potential threats to the organization's well-being. Of course, this will depend, at least in part, on the nature and size of your nonprofit. Once the key areas of concern have been identified, you will be able to estimate the amount of the necessary reserve. Moreover, you should specify the sources of revenue for the reserve.

2. Establish the parameters for your reserve policy. This will define the amount set aside for operating expenses. The exact amount will depend on a number of factors, including your nonprofit's mission, the amount of your operating expenses and the annual level of

contributions. Although there are no hard-and-fast rules, creating a reserve that covers three to six months of operating expenses is relatively common.

3. Indicate how the operating funds will be used if emergencies occur and the procedures to be followed under such circumstances. Furthermore, as part of the reserve policy you should establish how your nonprofit will handle funds that exceed the operating reserve balance. For instance, the board may want to authorize information technology upgrades or other expenditures when there is a surplus.

4. Adopt appropriate accounting procedures. It is recommended that you separate your nonprofit's reserve as a designated amount in the net asset section of the financial statement. This can show potential supporters that the organization is fiscally sound and that it has adopted sensible techniques for preserving its viability.

In summary: Virtually every nonprofit will face financial challenges at some point in its existence. Do not think that your organization is immune from the risks. At the very least, establish a reserve policy that meets your specific needs.