Now that you understand the meaning of an accumulated fund and its versatile usage, it’s time to discuss the importance of these funds. Here’s why NPOs strive to maintain a healthy accumulated reserve:
Financial stability
Accumulated funds act as a source of financial stability for the NPO in times of need. Non-profits can turn to these reserves to finance their operations when donations are low. For instance, an NPO can simply dip into its accumulated funds to finance a budget deficit instead of borrowing funds.
Flexibility for investment
As per Indian laws, NPOs like charitable trusts, religious boards, and societies can invest in mutual fund schemes. While there are some restrictions on the type of NPO and fund source in question, MF investments are possible. Eligible NPOs can invest accumulated funds in MFs and earn returns on the same to further their charitable activities.
Debt repayment
While business loans for charities usually come with a nominal interest rate, it is still prudent to repay the liability as soon as possible. Accumulated funds can be used to repay such loans early and reduce interest expenses.
Strategic reserves
As mentioned earlier, accumulated funds act as a rainy day reserve for the NPO. They can use the stored funds to tackle unexpected emergencies and ensure the organisation keeps running smoothly. For instance, most non-profits keep 3-6 months of cash in hand to fund operating costs. However, if the service demand for the organisation rises due to some emergency, these operational costs may double. In such cases, accumulated funds can be used to fund the deficit.
Support for expansion
With a healthy accumulated fund reserve, NPOs can invest in expansion plans and grow their service base without requiring external financing. Expanding their operations helps non-profits spread their influence and help more people.
Demonstration of financial management
Maintaining a healthy accumulated fund indicates prudent financial management. This inspires confidence among stakeholders, donors, and board members that the organisation can effectively manage resources.