1. What is an Operating Reserve Ratio Calculator?

Definition: This calculator determines the operating reserve ratio (ORR), which measures an organization's financial resilience by comparing reserve funds to annual expenses.

Purpose: It helps nonprofits, businesses, and financial managers assess their financial health and sustainability.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

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

Explanation: The ratio shows how many months of operating expenses the reserves could cover if income stopped.

3. Importance of Operating Reserve Ratio

Details: A healthy ORR (typically 3-6 months) indicates financial stability and ability to weather unexpected challenges.

4. Using the Calculator

Tips: Enter your total reserve funds and annual operating expenses in USD. Both values must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good operating reserve ratio?
A: Nonprofits typically aim for 3-6 months (ORR 0.25-0.5), while businesses may need 6-12 months (ORR 0.5-1.0).

Q2: Should reserves include restricted funds?
A: No, only unrestricted, liquid assets should be counted as reserves.

Q3: How often should ORR be calculated?
A: At least annually, or quarterly for organizations with variable income.

Q4: What if my ORR is too low?
A: Develop a reserve-building plan by allocating a percentage of income to reserves.

Q5: Can ORR be too high?
A: Yes, excessive reserves may indicate underutilized resources that could support mission/programs.