Nonprofit profits: Slack, surplus, and reserves

Despite the term ʼnonprofit,' organizations classified as such are permitted to earn profits, which are simply revenues in excess of expenses in any given year. The defining characteristic of these nonprofit organizations (NPOs) is the ʼnon-distribution constraint,' in which these annual or accumulated profits may not be distributed to a board of directors or other controlling entity. Other than this explicit distribution, NPOs have significant discretion over how these excess funds are ultimately used. This chapter addresses the issues of slack resources, margin, and operating reserves in NPOs; summarizes the current state of literature on these topics; provides an empirically-based snapshot of margin and reserves in NPOs; and considers what is currently unknown or unclear in the literature.