1. What is Operating Reserve Ratio (Monthly)?

Definition: The Operating Reserve Ratio measures how many months an organization could continue operating using only its reserve funds if all income stopped.

Purpose: It helps nonprofits and businesses assess their financial health and sustainability by evaluating their reserve adequacy.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( ORR \) — Operating Reserve Ratio (dimensionless, represents months)
• \( R \) — Reserve funds (currency, e.g., USD)
• \( E \) — Annual expenses (currency, e.g., USD)

Explanation: The annual expenses are divided by 12 to get monthly expenses, then reserve funds are divided by this monthly expense figure.

3. Importance of Operating Reserve Ratio

Details: A healthy ORR indicates financial resilience. Nonprofits typically aim for 3-6 months of operating reserves, while businesses may have different targets based on their industry and risk profile.

4. Using the Calculator

Tips: Enter your total reserve funds and annual operating expenses. Both values must be > 0. The result shows how many months your reserves could cover expenses.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Operating Reserve Ratio?
A: For nonprofits, 3-6 months is typically recommended. Businesses may need more or less depending on cash flow volatility and industry standards.

Q2: Should I include restricted funds in reserves?
A: No, only include unrestricted funds that are truly available for operating expenses.

Q3: How often should I calculate this ratio?
A: At least quarterly, or whenever there are significant changes to your financial position.

Q4: What if my ratio is too low?
A: Develop a reserve-building plan by setting aside a percentage of revenue or reducing expenses to build reserves.

Q5: Can the ratio be too high?
A: Yes, excessive reserves might indicate you're not deploying resources effectively to fulfill your mission or grow your business.