Nonprofit Cash Reserves: Three Smart Ways to Handle too Much Cash
While it may seem rare, we’ve been seeing more instances of nonprofits receiving windfalls of cash. And as wonderful as ‘too much cash’ may seem, it’s also daunting. Large cash reserves come with large amounts of responsibility — especially in the nonprofit world. So how do you do the most good with that money? In order of priority, here are the best ways to handle too much cash.
1- Increase your nonprofit’s operating reserves
Operating reserves are monies set aside to help stabilize your nonprofit’s finances. It’s money that provides a cushion against unexpected events (like the COVID-19 pandemic) losses of income, and significant unbudgeted expenses. A typical operating reserve goal for your nonprofit would be enough money to cover three to six months of expenses. Remember that the investments chosen for an operating reserve should be highly liquid, such as a money market account or short-term CDs. That way, you have immediate access to additional cash when you need it.
2 – Increase your nonprofit’s capital reserves
After increasing operating reserves, you’ll want to give your capital reserves a boost. A capital reserve refers to a specific fund or amount set aside that caters to future or unpredictable expenses or losses. And when we say future, we mean quite a bit later — like ten years or more. For example, if your roof has ten years of life left in it, replacing it with a new one is a predictable, long-term future need. So, with those kinds of timeframes in mind, it’s a good idea to invest capital reserve money in securities or other investments that are lower risk and less liquid, like a diversified portfolio of dividend-paying stocks or a CD.
3 – Establish a quasi-endowment for your nonprofit
Quasi-endowments are similar to “rainy day funds.” They’re different from endowments, as they’re earmarked by the board rather than by donors. They’re beneficial because the board, at their discretion, may redirect quasi-endowment funds to another purpose. (A true endowment is subject to the donor’s restrictions, so it doesn’t have this same flexibility as a quasi-endowment.) Either way, both types of endowment funds are typically invested very long-term — usually forever. As a result, endowment funds are often allocated to investments that carry more market risk, such as stocks and bonds, maximizing the potential for long-term gains.
While not everyone has the “problem” of excess cash, it’s smart to plan ahead, be ready, and know what to do should it happen. And if you need additional advice or help with other nonprofit accounting challenges, our expert team at Qbix is happy to help. We’re already working with many nonprofits across the US, just like yours, in areas such as social, family, senior citizen and children’s services, community improvement, churches, foundations, and more. So, schedule a free consultation call today. All it will cost you is a bit of time. If you’re ready to gain knowledge, save time, and boost your funding capabilities, then don’t delay — let’s get started today.
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