Reserves, unrestricted funds and funding diversification

1The reserves policy

A reserves policy, adopted by the board, answers four questions:

• Why: to cover late payments by donors, fund end-of-contract indemnities, respond to an emergency before any funding arrives, absorb an exchange loss or a cost declared ineligible.
• How much: a target calculated from the risks, not an arbitrary figure.
• Who decides on use: authorisation thresholds (management, treasurer, board).
• How to replenish: a 2- to 3-year plan when the reserve is used.

Risk-based calculation. Example of an NGO with 12 million USD a year:

That is about 1.3 months of total expenditure. A target reserve justified in this way is much easier to defend before the board, donors and private supporters than a "three months" taken from a manual.

2Unrestricted funds, a strategic resource

Unrestricted funds (free private donations, membership fees, earned income, some flexible multi-year institutional funding) are scarce: often less than 10% of a humanitarian NGO's income. Yet they are the only funds that make it possible:

• to respond in the first 72 hours of a crisis;
• to cover the costs donors do not pay for (fundraising, innovation, preparedness, shared cost shortfall);
• to enter a country or a sector before a donor commits to it;
• to build and rebuild reserves.

The golden rule: unrestricted funds must be allocated by explicit decision, in the organisation's annual budget, and not consumed by default to fill gaps. An organisation that "discovers" at year-end that its free funds have covered project overspends has lost its strategic freedom without deciding to.

3Diversifying: costs and returns

Each funding source has an acquisition cost and a return. The useful ratio: cost of fundraising / amount raised (or its inverse, the return on investment).

• Institutional donors: large amounts, high cost of proposal writing and compliance, restricted funds.
• Foundations: medium amounts, often more flexible, long-term relationship.
• Individual donations: high start-up cost (the first gift often costs more than it brings in), but regular donors are profitable over several years.
• Private sector: sponsorship, technical or logistics partnerships, sometimes in kind.
• Earned income: services (training, studies, warehouse rental), to be checked against the organisation's tax status.

Example. A regular giving recruitment campaign costs 60,000 USD and recruits 1,000 donors at 15 USD a month. 30% stop in the first year; thereafter, assume 1,000 × 70% = 700 active donors on average over 3 years. Income over 3 years ≈ 700 × 15 × 36 = 378,000 USD. Return: 378,000 / 60,000 = 6.3 dollars per dollar invested, but with a first year that is probably loss-making. Funds are therefore needed to invest before reaping the returns.

4Pooled funds and anticipatory financing

Several humanitarian funding mechanisms have particular financial requirements:

• Country-based pooled funds (CBPFs, managed by OCHA): open to national and international NGOs after a capacity assessment that sets a risk level. The level determines the maximum project size, the pace of instalments and the frequency of controls.
• CERF (Central Emergency Response Fund): funds United Nations agencies, which then sub-grant to partners.
• NGO emergency start-up funds (networks such as the Start Network): decisions within 72 hours, lighter reporting but very short spending deadlines.
• Anticipatory financing: funds released before a foreseeable shock (drought, flood) on the basis of trigger thresholds; procurement and payment procedures must be ready in advance.

Risk level example. An NGO rated "high risk" by a country fund receives its funds in three instalments (for example 40%, 40%, 20%), with a financial check before each instalment. Rated "low risk", it can receive 80% on signature. The cash stakes are considerable: investing in its systems to improve its rating is often the best financial investment a national NGO can make.

5Innovative financing

Beyond grants, the sector is experimenting with several instruments:

• Parametric insurance: a payout is triggered by an index (rainfall, wind speed) rather than by loss assessment. Example: African regional drought insurance mechanisms.
• Impact bonds: investors pre-finance a programme; the outcome payer repays with a return if the agreed results are achieved. Requirement: rigorous measurement of results and high structuring costs.
• Blended finance: combining grants with loans or guarantees to attract private funds, more common in recovery than in emergencies.
• Islamic social finance: zakat, waqf, sukuk with a humanitarian purpose, with their own eligibility rules on beneficiaries and investments.
• Payment by results: the donor pays per verified result (for example per child vaccinated), which transfers performance risk to the organisation.

Before adopting an innovative instrument, ask: who bears the risk if the results are not achieved, and does the organisation have the reserves to absorb it?

6Investments and managing surplus cash

An organisation holding significant reserves or advances must have a prudent investment policy, adopted by the board:

• Priorities: security of capital, then liquidity, then return, in that order.
• Acceptable instruments: interest-bearing accounts, term deposits in sound banks, short-term government securities. No speculative investments.
• Diversification of banks: do not concentrate everything in a single bank, especially in a fragile country.
• Interest on donor funds: many contracts require interest earned on advances to be declared and used for the project, or returned.
• Ethical and religious considerations: exclusion of certain sectors, preference for products compliant with Islamic finance depending on the context.

Example. 1,000,000 USD of reserves: 400,000 in a current account and an interest-bearing account (immediate liquidity), 400,000 in staggered 3-month deposits, 200,000 in 12-month deposits. At 4% a year on term deposits and 1% on the interest-bearing account (with 300,000 placed in it), income is about 600,000 × 4% + 300,000 × 1% = 24,000 + 3,000 = 27,000 USD a year, without compromising the ability to respond.