Can Nonprofits Have Too Much Cash?
Too much cash? Wouldn't that be a nice problem to have? In this issue, we'll examine the costs and benefits of holding on to funds from year to year, the best way to deal with criticism and some goals to set for cash on hand.
Management Tip
Can your nonprofit have too much cash in the bank? I wouldn't be surprised if, as you read the question, you came down firmly on one side or the other of this issue. These different points of view are summarized as:
YES! HAVING TOO MUCH CASH IS IMMORAL! WE SHOULD BE SPENDING IT ON MISSION!
NO, ARE YOU KIDDING? HAVING MORE CASH GIVES US BREATHING ROOM AND OPTIONS! I'M SICK OF BEING CASH POOR!
I'm sympathetic to both viewpoints but, of course, the answer is a bit more complex and nuanced, and the real question behind all of this is "How MUCH cash is too much?" Let's drill down a bit.
First, some definitions. Cash in this context is unrestricted cash, CD's , savings, etc. The key word is unrestricted, meaning the board and staff can allocate it as they please. Now, why would you want to save cash and not spend it immediately on mission (or on the staff who provide your mission)? Because you need your cash for working capital, you need your cash for flexibility in crisis, and you need your cash to show stability to board, staff, funders and community.
My overall standard for cash on hand has always been 90 days....but that's a ROUGH target. Most highly successful nonprofits have anywhere from 120-150 days of cash. To get a rough idea of how many days of cash your nonprofit has, simply divide your annual budget by 365. That's more or less one day's cash. Now add up your cash (checking, savings) on hand and divide your one day cash amount into your total cash. The result is a good, but not perfect, approximation on days cash on hand. That number represents how long you could stay in operation (at current levels) if your income all stopped. It's your safety net, your breathing room, your good stewardship funds.
Can you have too much cash? Sure. If you hoard cash while neglecting mission quality, that's unacceptable. If you have 2 years of cash on hand and haven't given staff a raise in 3 years, that's wrong. If you've become so risk averse that you won't invest any funds in innovation, that's also bad stewardship.
So how much cash should your nonprofit keep in the bank? It depends on many things: your funding sources, your infrastructure, your staffing versus volunteer ratio, etc. But, in my experience, most nonprofits would be well served by setting a goal of increasing their cash on hand. Yes, even in a recession. I know of very, very few organizations that truly have more cash than they should.
My suggestion to you is to gather a small team; CEO, CFO, board treasurer, your banker, your CPA and perhaps one more financial expert. Look at your strategic plan, your long range budget, your cash flow, and other financial impacts and come up with a "days of cash on hand" goal to recommend to the board. Review this number every other year, as the situation will change.
I would also urge you to read The Nonprofit Starvation Cycle, from the Stanford Social Innovation Review.
Resources
How Much Cash Should Your Agency Have? A good analysis of data on this subject from the Bayer Center For Nonprofit Management
State of the Sector: Low or No Cash is the Norm Another good (but chilling) analysis from The Nonprofit Finance Fund
Smart Stewardship for Nonprofits: Making the Right Decision in Good Times and Bad, by Peter Brinckerhoff. In the chapter on cash, I give readers tools to estimate their cash needs.
Marketing Tip
I know it probably doesn't sound smart to "market" your cash balance, but you'd be surprised. Letting the community, particularly sophisticated donors and funders, know that you're financially stable is a good thing, not a bad thing. I hear from big donors all the time that they never, ever "invest" their donations in weak nonprofits. "I never buy stock in a weak company....why would I donate to a weak nonprofit?" is a common theme.
That said, you can't keep your financials secret anyway. I can go on Guidestar and read through your IRS 990 in about 3 minutes, and know how much you have in the bank (at least as of the date you last reported it). So the key is how to manage the information. How do you explain to the community (when asked) about your cash on hand? What about staff? What do you tell them.
First, know your numbers. Know how much cash on hand you have, and translate it into days of cash (see the Management Tip above). Relate the seemingly big number of cash on hand to real operations. For example, say your organization has $200,000 in savings. Now, $200,000 sounds like a lot of money to most of us, but if your nonprofit has a $5million annual budget, that $200k equates to only 14.6 days of operations. Just over two weeks. In other words, not long.
Second, look at other similar sized nonprofits near you (read their 990's) and be ready with comparisons. Then, focus on colleges, hospitals and universities, nearly all of whom have sizeable endowments that no one gripes about. Remind people that your nonprofit and the local college are both 501(c)(3)'s...and both organizations need strategic reserves.
Finally, make sure you have a defendable number: in the management tip above, I suggest putting together a team to set your cash goal. If that team of staff, board and outside experts sets the number, it's much more defendable.
Money enables mission. Profits enable more mission. Profits usually result in cash being put aside to take advantage of future mission opportunities. It's a good thing, not a bad one.
Technology Tip
What does tech have to do with cash? In this case, it helps with transparency. In both the Management and Marketing Tips, I note that cash is a good thing, not a bad one. So, make sure your website provides easy access to your most recent 990, your current budget summary and your most recent audit.
But more than that, put your outcomes online. People will be less critical of your cash on hand if they see you are growing your mission impact. Tell your story, and tell it with your technology, on your website, your Facebook page and via Twitter. Use your tech to get ahead of any criticism.