If there is anything a two-year global health and economic crisis has shown nonprofits is that financial stability 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 a emergency. An untimely mistake or an unanticipated loss can require a sufficient cash buffer, a benefit many organizations don’t enjoy.
The pandemic left many nonprofits realizing they weren’t prepared to service their community and fundraise virtually when the pandemic forced facilities to remain closed. Organizations with concentrated revenue sources before the pandemic may have found themselves even more desperate to maintain sufficient financial resources. However, those nonprofits that were financially robust were resilient through the crisis, adapting to the new reality. Today many may be even stronger in fulfilling their mission as life goes back to “normal”.
So what do these nonprofits do to build up financial resilience? Resilient nonprofits practice these financial strategies.
1. Maximize “profit”
We’re 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.
2. Prioritize, price and defend against the likeliest challenges
Organizations that identify and value the risks that they think are most likely going to happen are closer to financial resilience. This analysis should inform the size of the nonprofit’s operating reserve. There is no one-size-fits all for operating reserve. 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, services at-risk communities, is highly regulated and basically 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 and satisfies your donors and board members that the organization can survive the unexpected.
3. 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 known or unexpected spending. Yet funds that aren’t needed for a few months can get better yields than sitting in a checking account. As of this writing in late 2022, with the Fed’s increasing interest rates, 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 bond or even stock funds. But before nonprofit investors make these riskier decisions, it needs to understand, preferably with a professional, how well positioned it 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.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!
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