Financial reserves for NGOs at different levels: what do you need to know?  

According to data from research ?The Importance of the Third Sector for GDP in Brazil?, March 2023, coordinated by Sitawi, commissioned by the Movement for a Culture of Donation and executed by FIPE/USP, the third sector is responsible for more than 4% of the Brazilian GDP? which represents more than R$ 400 billion added to the country's economy.  

Financial reserves for NGOs at different levels: what do you need to know?  

Despite the economic relevance of NGOs, some institutions still face difficulties in maintaining themselves: more than a third of organizations cease to operate after 5 years of operation, according to IPEA data. This is due to several factors, but mainly to financial instability.   

As they are called non-profit organizations, many believe that non-governmental institutions cannot have spare money or financial reserves. However, this idea is wrong: NGOs may have a surplus of financial resources and these need to be saved for the future (which could even be next month).  

NGOs need financial sustainability  

Just like private companies, third sector organizations have different sizes and maturities. Considering the different aspects of an NGO's financial management is essential to define the ideal approach to financial reserve. Check out our view on the 3 basic types of reserves that NGOs can/should structure:  

reserve fund operational 

Did you have a weaker month of fundraising?   

In this case, your organization will need a reserve to continue operating at the same level, while looking for alternatives to regain revenue levels, and/or adjust expenses..  

This type of fund should aim to cover the total amount for the organization's expenses over a given period (e.g. salaries, rent and bills for 3 or, ideally, 6 months).  

In practice, all the resources that are in the current account and do not have a pre-defined destination make up the reserve fund and, the more the better, but only up to a level that allows the organization's managers to make decisions more guided by the benefit throughout the time than short-term needs. This means that organizations with smaller reserves need to have actions that work in the short term, while organizations with greater amounts of resources can plan for the long term. 

Challenges/Opportunities Fund 

Does your venue need a new roof in a few months? Is a program coming to an end and will it be necessary to demobilize? and compensate? part of the team? Is an activity in high demand and will it make sense to invest in structuring a new area? 

These are some of the situations in which this resource will be used. This type of fund is created to deal with expected future disbursements – even if with an uncertain date – that occur with an organization. It is a type of “savings” that we intend not to touch until the indicated event materializes. To do this, it is suggested that it be in a current account separate from the operations account. 

It is common for, in practice, the two previous funds to be confused and end up becoming a single “emergency” fund – foreseen and unforeseen. On the other hand, best practice is that, as the Operational Reserve Fund reaches its objective, additional resources are stamped into the challenges/opportunities fund. 

Equity Fund  

When the funds with short and medium-term logic are more or less “full”, it is time to think about a long-term fund, aiming to guarantee perpetuity for your cause.  

Endowment Funds represent a long-term reserve, which will generate monthly financial returns for your organization. Do they start with an initial contribution? high or low – which is preserved and invested, but yields a monthly percentage that returns to the organization. This means that the NGO has an amount allocated in a reserve, but does not consume it. The resources used in projects and programs will, in fact, be the income from this value.  

For this reason, Endowments ? Synonym for Equity Funds? They are for the long term and are generally created by medium and large organizations that already have a certain financial maturity. Obviously, the greater the amount invested, the greater the return tends to be. 

Sitawi's partnership with Endowments do Brasil – the first multi-cause and multi-beneficiary Patrimonial Fund Management Organization (OGFP) in the country – enables differentiated conditions for any organization*1 can access the Endowment Fund mechanism as provided for in law 13,800, which brings more transparency and security for donors, as well as lower costs for organizations, since the legal, administrative and financial infrastructure is shared. 

For an organization to create its own OGFP, the initial contribution is recommended to be R$15-20 million. With our solution, an NGO can start an Endowment immediately from a much smaller resource and offer the possibility for its donors to support this reserve. 

This is how we created the first fund focused on the LGBTQIAPN+ cause. The partnership between Sitawi and Endowments do Brasil is ideal for institutions like Casa Chama, which  started his own fund with the intention of reverting this investment to his projects, but he did not need to create and manage another organization. 

Have you identified with the objectives and requirements of an Endowment Fund?

  1. *There are still some criteria required for organizations interested in establishing an Endowment Fund with Sitawi. ?Any organization? means that our conditions cover a greater portion of third sector institutions, not just the largest. ??

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