Running on Empty: Nonprofit Doesn’t Mean No Profit

The term “nonprofit” was never supposed to mean an organization that is managed in the red. It simply means that surplus income pays to further the organization’s mission and is not distributed to shareholders or members. The idea that nonprofits need not strive for positive revenue hurts the sustainability of a vital sector of the US economy.

Unfortunately the reality of the unprofitable nonprofit is far more common. A January 2018 report by Oliver Wyman, SeaChange Capital Partners, and GuideStar[1] demonstrated that many nonprofits struggle financially. 50% of nonprofits had less than one month of reserves and almost 8% were technically insolvent. The report goes on to say that restoring solvency to those beleaguered nonprofits would require an injection of nearly $50 billion dollars in capital. Inadequate operating reserves force nonprofits to take drastic measures—downsize staff, abandon strategic plans or sell mission-critical assets—to free up cash to pay for a minor hiccup that insurance would never cover. Deciding how much a nonprofit needs in emergency cash reserves—or “911 Cash” as we call it at Fairlight—requires understanding how the organization works, some analysis and collaboration within the organization’s leadership.

Once a nonprofit can demonstrate a suitable financial cushion, donors, grantors and other important collaborators will believe the organization is serious about delivering on the philanthropic mission.

To understand how much in cash reserves a nonprofit needs, we first need to clarify the definition of Risk.

While many people associate the word Risk with the unthinkable—an earthquake, a major recession, a lawsuit—a more applicable definition is “uncertainty”.

• galas not meeting fundraising targets, (BAD!)

• supplies costing more tomorrow than they do today, (BAD!)

• finding new facilities that meet all the organization’s needs (GOOD!) or

• launch an unplanned and un-budgeted critical project (GOOD!).

The very best nonprofits have the appropriate level of reserves to quickly address unanticipated challenges or opportunities because they’ve done the work to understand the organization’s particular uncertainties.

Remember that nonprofit shouldn’t mean “no profit”. Instead philanthropic organizations should strive for financial solvency to enable its mission to endure.

[1] The Financial Health of the United States Nonprofit Sector: Facts and Observations, Oliver Wyman, SeaChange Capital Partners, GuideStar, January 2018.

Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!