Managing Nonprofit Cash Reserves: Don’t Sit on that Pile of Cash!
by CFO Selections Team, on Sep 18, 2023
Of course, nonprofit leaders can choose to do nothing and just hold onto that cash until their hand is forced and they need to use it. Unfortunately, this approach poses two threats:
While some nonprofits have been dealing with cash deficits over the last few years, others have experienced the opposite – too much cash! Granted, this “problem” is a much better one to have! However, it still poses a question that needs to be answered strategically to ensure a healthy future for the organization: “What do we do with the cash we’re sitting on?”
- Not utilizing available cash to make strategic moves can cause an organization to miss out on key opportunities for growth, reducing its long-term effectiveness.
- Sitting on cash gives the impression that the organization does not really need the money, which can diminish future giving from donors. Afterall, if an organization already has more than they need, why would donors keep writing the big checks?
For these reasons, it may make sense for an organization to put some of their available funds towards activities like expanding, hiring, partnering, creating an endowment, or building additional capacity. But whatever a nonprofit does with excess funds must align with the organization’s core mission, be fiscally responsible, and aim for long-term sustainability. Nonprofit leadership should have clear financial justification for how they are using surplus funds and transparently convey this rationale to donors and other key stakeholders.
Reaching New Audiences with Existing Services
The most obvious place for an organization to use extra cash is reinvesting in their mission. Putting funds towards bringing existing offerings to a new audience is a common strategy that nonprofits will use as they grow their donor base and generate additional cash. Expanding geographically to another county, city, or state is one area is the most common example of this strategy.
Ask: Who/where/what else could benefit from what we are offering?
Example: An organization offering temporary housing for people experiencing homelessness could open an additional shelter in the next county over to serve people in that area as well. The organization is already familiar with what it takes to run a shelter, so they invest some of their funds to expand outward to follow that same model in another area.
Expanding Programs or Initiatives
Another way to use excess cash is to offer new programs or initiatives to their existing audience. This is an expansion strategy that varies greatly from the last one because instead of expanding “outward,” an organization is expanding “upward” to do more outreach in the community. Often this is accompanied by doing additional marketing to reach new donors and gain more supporters, as well as updating the organization’s website and increasing its online presence to promote their new offerings.
Ask: What else does our audience need that we can help provide?
Example: Using the same example as before, the organization running the homeless shelter may decide to offer career services as well – providing not only a place to stay but also GED programs, job placement help, and interview coaching. The organization knows its core audience well enough to understand what kinds of adjacent needs they have, and they invest their funds in meeting those needs as well.
Hiring More Staff
There is a lot to consider in nonprofit hiring right now, but bringing in additional staff may be the best use of a nonprofit’s excess cash because doing so can allow an organization to reduce the burden on its existing staff. Additionally, if the organization plans on serving new audiences or expanding their offerings, it will likely need increased staff to accomplish those expansion plans. A nonprofit should lean on its financial leadership to determine if hiring is the best move for the organization. Each organization will need to do a cost-benefit analysis around hiring additional staff to determine if the value of hiring outweighs the added salaries/benefits costs. In some cases, it may make more sense to outsource activities rather than hiring in-house.
Ask: Will adding headcount help the organization to accomplish its mission better?
Example: The organization’s CFO/Director of Finance develops a smart hiring strategy that takes into account the costs of salaries, training, health care plans, supplemental benefits, and other perks to determine which areas will see the most value in bringing on additional staff.
Forming New Partnerships
Knowing when to partner with another organization is always tricky, but when that opportunity comes with a steep buy-in cost, that question gets even more complicated. A strategic move like that can offer greater effectiveness, improved efficiency, a wider reach, and increased credibility as well as provide additional funding. Of course, in some cases it can also lead to mission creep, resulting in confusion, conflict, staff turnover. It is important to forecast what the result of a partnership may look like and make strategic decisions from there.
Ask: How will this collaboration help the organization? How could it hurt it?
Example: When an organization that is well-established and financially strong decides to collaborate with another organization, it must ensure that the partnering organization is coming to the table with strengths of their own to create a mutually beneficial relationship. If an organization seeking to end homelessness partners with a local food bank or substance abuse organization, both should be financially stable enough to exist independently outside of the partnership regardless of what kind of benefits they gain by operating collaboratively.
Setting up an Endowment
If a nonprofit decides to set up an endowment, it can create a way to generate financial support and stability over the long-term. Using existing funds to launch a fundraising campaign for the endowment is an investment in the organization’s future because grants and donations can be directed into the endowment and then the interest can be used for the organization’s ongoing management costs. Endowments are flexible enough to be structured around an organization’s goals, making them a solid option for nonprofits that are looking for ways to use their cash strategically to set themselves up for future success.
Ask: Does it make sense to create an endowment? Do we have the financial leadership needed to effectively manage an endowment?
Example: If a nonprofit is experiencing a sudden windfall of cash, creating an endowment can set the organization up for long-term success while the cash is available to do so. This endowment can then be pitched to new and existing donors as a way to build a legacy of charitable giving through the foundation.
Investing in Capacity Building
All organizations are capacity constrained (at least to some degree) but investing in building additional capacity can help a nonprofit to do what it is already doing better. Offering staff training/upskilling, upgrading technology, improving infrastructure, and investing in research can help a nonprofit better achieve its mission by increasing its capacity.
Ask: Where are we capacity constrained? What do we need to increase capacity in that area?
Example: When a nonprofit invests in a new tool designed to allow employees out in the field to schedule appointments, log important information, request reimbursem*nts, access participant records/charts, or report problems virtually in real-time without needing to come back into the office or wait on hold on the phone, it is improving its ability to perform the services it offers. The result is not only greater efficiency but also increased capacity. Using excess cash to invest in these types of tools can be highly beneficial as well as appealing to investors.
Building Reserves
Of course, just because you have extra cash does not mean you need to spend it. There may be times when the best solution really is holding onto it. Resist the urge to invest in an Executive Director or Board President’s pet project simply because you have the funds to do so. If a cost-benefit analysis of available opportunities does not identify a place where funds are going to be well spent, sit on that cash a little longer!
Ask: Is it fiscally responsible?
Example: An organization may choose to pay down existing debt and then hold onto the rest of their excess cash for the time being if that makes the most financial sense.
When you need help with nonprofit cash management, reach out to us! Our team of CFO consultants has the experience needed to provide sound financial advice to your organization. We offer nonprofit financial consulting for organizations looking to be good stewards of their funds while maximizing their impact. We can conduct a financial assessment and provide recommendations on what your organization should be doing with its cash reserves to further its mission. Reach out to us to find out more today!
