Here at NEW the financial services team gets questions about financial best practices for nonprofits regularly in our work. This post will focus on best practices for nonprofits who have experienced a surplus of cash – what’s the best way to use these resources? One option some organizations have considered is investing this surplus. Below is what we recommend and why:
A surplus of cash is a great problem to have! However, we do not recommend investing this cash, as volatile and unpredictable markets make an investment loss more likely. Additionally, investment gains are hard to justify to the IRS and maintain 501c3 status. For these reasons, NEW recommends lower-risk investments and building a cash reserve more easily accessible in times of need for an organization.
Developing a cash reserve policy with your board is a best practice for managing a cash surplus. A Cash Reserve or Reserve Fund is an amount determined by the Board that is set aside for emergency use only — the Board must vote to access those funds, and must commit to a date by which the funds will be replenished once the emergency spending is complete. Usually, that amount is set as equivalent to anywhere between 3 months of operating expenses and 18 months of operating expenses — whatever you feel is sufficient to help the organization through a worst-case scenario where assets are lost or damaged and normal operational funds or income are not available. A Reserve Fund would have allowed you to pay your bills and keep you running. NEW recommends holding these funds in a short-term, lower risk savings account like a certificate of deposit (CD). Credit unions often provide higher interest rates than banks for CDs, and these funds would be available to cash out on shorter notice than more complicated investments.
Do you have questions about financial best practices for your organization? Wondering about cash flow, or accounting for grants? Connect with us by filling out our interest form here or check out our financial learning community program Road to Resilience