Research note: Bridging the gaps between the theory and practice of nonprofit operating reserves

Over the last decade, scholars and practitioners have advocated for nonprofits to develop operating reserves to help them survive economic shocks, but questions about what can be considered financial reserves remain. To understand what it takes to build reserves, most previous studies used Liquid Unrestricted Net Assets (LUNA) calculated from organizations' Form 990 tax returns as the measure of reserves. Practitioners, however, seem to conceptualize reserves differently. Drawing from an original survey of arts and culture nonprofits as well as human services nonprofits administered during the early days of the COVID-19 pandemic, we compared self-reported measures of reserves to those based on academic definitions. We then explored if the factors found to estimate the size of nonprofit financial reserves in previous studies would predict the level of reserves that practitioners consider. Whether using the book value of reserves (i.e., LUNA) or the way practitioners think about reserves, we generally reached the same conclusions regarding the factors associated with reserve levels. These findings increase the reliability of studies that use LUNA despite the differences between "book" measures of reserves and how leaders consider their rainy-day funds.