The very recent risk of a federal funding freeze and the recent stock market selloff have shown us that financial stability for nonprofits is fragile. Even with good nonprofit financial planning, organizations survive on the thinnest of margins, focusing all resources on the philanthropic mission, often with very little wiggle room to maneuver out of an emergency. An untimely mistake or an unanticipated loss can require a sufficient cash buffer, a benefit many organizations don’t enjoy.
The risk of a federal funding freeze and recent economic news has left many nonprofits realizing they weren’t prepared to find alternate revenue sources or pivot fundraising techniques to accommodate a lack of government funding. Organizations with concentrated revenue sources or fragile operational processes have been challenged to move quickly to develop alternative methods. However, those nonprofits that are financially robust will remain resilient, adapting to the new reality and ready to weather the current federal funding uncertainty.
So how do nonprofits build up financial resilience? Resilient nonprofits practice these financial strategies.
- Maximize “profit”
We are a believer that nonprofits should try to maximize their surplus income every year. Nonprofit donors expect leadership to manage headwinds such as inflation or unexpected events like a key resignation, legal challenges or a major process breakdown that hinders the philanthropic mission. Trying to squeeze a little more than what’s been budgeted is necessary.
- Prioritize, protect and defend against the likeliest challenges
Organizations that identify and value the risks they think are most likely to happen are closer to financial resilience. This analysis should inform your leadership of the size of the nonprofit’s operating reserve. There are no “one-size-fits all” for operating reserves. Organizations with very basic processes and little in the way of infrastructure may need as little as four months of emergency funds. Some might need 12 months and more in reserves if the organization is operationally complex, serves at-risk communities, is highly regulated and needs much more funding to function effectively. The operating reserve should be commensurate with the risk of the organization so reserve what your community needs. This approach will satisfy your donors and board members as they will recognize the organization can survive the unexpected such as a federal funding freeze, a global pandemic or a steep rise in inflation.
- Match timing and risk of funds to appropriate investment
Knowing the specific amount and timing of an expenditure is an important factor to determine where to invest funds. For example, immediate, quick access cash should be in the bank, whether it’s for a known or unexpected expenditure. Funds that aren’t needed for a few months can obtain better yields in a money market fund or brokerage account rather than sitting in a checking account. From 2022 to this writing in Q1 of 2025, the Fed has raised and kept interest rates higher than the previous 20 years (except for 2005-2007). For now, higher-yielding investment options exist for short-term funds not needed immediately. When funds aren’t needed for years, nonprofits can explore riskier investments like longer-dated bonds or even stock funds. But before nonprofit investors make these riskier decisions, they should understand, preferably with a professional, how well positioned the organization is to weather the ups and downs of investment values. After all, we know that while rare, bear markets—defined as a 20% drop from its most recent high—do happen.
If your nonprofit is looking to better map its spending needs with the appropriate investment options, contact us for a free consultation.
Fairlight Advisors
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