UNRESTRICTED CASH

Don’t confuse your organization’s net worth (or fund balance, in nonprofit accounting parlance) with your unrestricted cash. You may have a fund balance that is large, but it could be that it has little liquidity. Liquidity comes with your sum of unrestricted cash. That’s the money you can get to for any budgetary purpose right now. Those are your reserves.

The common question is this: how much do you need in reserves?   Some say a year’s worth of revenue. Others argue for six months’ worth. Still others say three months of funds. I know organizations that feel good if the bills are paid and there is $1.83 in the bank at the end of the month. The truth is, there is no right answer.

To answer the question of how much excess money to have in the bank is found in the three purposes of reserves. First, reserves help fund the months when income is normally down, thus helping your annual cash flow. Those reserves will be restored later when income is higher. If you don’t have cash flow reserves, you need to either tap a bank line of credit or drive your creditors crazy by not paying your bills on time. Reserves solve the problem of cash flow. Second, reserves help with emergencies. These could be internal problems, such as the sewer line, to everyone’s surprise, breaks up and the only answer is backhoe work, a big ditch, new pipe, and a pile of bills. Or, it could be external. Mount St Helen’s blew its top the day before an organization I was leading had one of its annual big fundraisers, a jog-a-thon. With ash in the air and on the ground, there was no jogging, and there was no fundraiser income. Fortunately there were reserves to carry through until the event could be rescheduled. Finally, you could have an unusual opportunity to purchase a piece of property, some equipment, start a new program, or something else, all of which would be possible only if you had some extra cash on hand.

Those are the reasons – cash flow, emergencies, and opportunities. The amount, or percentage of your annual budget, is your choice. For some the amount will be larger that it will be for others. In any case, when needs are going unmet as related to your mission, there is certainly no reason to hoard large sums of cash that exceed the three reasons given above. After all, your nonprofit is about mission, not huge sums of unspent money that goes beyond the normal needs of cash flow, emergencies, or opportunities

For more information be sure to check out my book Board Essentials: 12 Best Practices of Nonprofit Boards

About Dave Coleman

Dave Coleman Principal / Consultant Phone: 253-237-4118 After many years of nonprofit leadership and the privilege of getting to know hundreds of organizations through my work with the M. J. Murdock Charitable Trust, I am pleased to offer my services to you at BoardTrek Nonprofit Consulting. Our small Pacific Northwest based company is focused on helping guide nonprofit organizations and their leaders into the future by offering our services in board governance, strategic planning, leadership development and organizational change. Always feel free to contact me with your thoughts and questions.
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One Response to UNRESTRICTED CASH

  1. Jim Galvin says:

    Dave,

    Exceptional post.

    Jim

    James C. Galvin, Ed.D. 630-240-2749

    Like

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