Net assets is defined as total assets less total liabilities, and represents the accumulation of all surpluses and losses since the organization began operations.
The amount of net assets that an organization should hold is influenced by a number of factors, which will be unique to your circumstances. As a result, there is no standard calculation or rule of thumb that applies to all organizations. Many not for profit organizations experience a healthy tension between using its resources to achieve its mission today and ensuring there is sufficient financial stability to operate in the future.
Factors that may impact the amount of appropriate net assets for your organization:
- Stability of external funding and fundraising: consider your funding agreements (are they year to year or longer term?) and your fundraising activities (long history of strong support? Strong reputation?)
- Risk tolerance of the Board and management team: the stewardship philosophy of the leaders influences how conservatively the organization operates
- Future strategic plans: consider plans for next year or future years that will require an investment – are you expanding or creating new programs? Are you building a new facility?
- Accountability to members, customers and donors: key supporters may object if it is perceived that funds continue to be collected, but are not used in achieving the organization’s mission
- Externally restricted net assets: if you have received funds that must be used for a specific purpose, these amounts are not available for general operations or other discretionary purposes
- Restrictions by third parties: consider if you are required to maintain a minimum net asset amount by a funder, financial institution or through other contractual or legislative arrangements.
One useful measure is to calculate the number of months you could operate without any revenues (unrestricted net assets/total annual expenses x 12 months) – this indicates how long your organization could continue if there were a catastrophic change to your revenue sources and thus, how much time the Board and management have to react to such an event. This calculation adds context to the dollars reported for net assets and annual expenses.
Establishing a benchmark for your net asset position can be helpful when making other decisions for the organization, such as setting fees for services. If the organization’s net asset position is not currently where you want it to be, the benchmark can serve as a goal for the organization to work towards.
Other articles on Board Governance to read:
- How big should our board be?
- How often should we review our policies?
- How do I find board members?
- What does oversight mean?
- What does risk management mean?
- What are the top internal control tips for small organizations?
- Donations & Fundraising - what is your policy?
- Why is effective budgeting important?
- Is the CEO doing a good job?