Nonprofit strategies for managing reserves

• May 12, 2022
• Kelsey Vatsaas

By Peter Holupchinski, CLA Senior Wealth Advisor

In early 2020, the coronavirus pandemic caused profound economic and financial damage to nonprofits across the country. Markets became destabilized, causing volatility not seen since the global financial crisis. Every nonprofit’s board of directors was forced to ask themselves: how will we survive?

During periods of hardship, having sufficient operating reserves can spell the difference between survival and insolvency. The need for sufficient reserves has become increasingly apparent during the pandemic, and nonprofits may want to reexamine their reserve policies and consider increasing reserve levels above what they previously thought reasonable or feasible.

Fast forward to today and the financial fortunes of countless nonprofits are in a completely different place. Between government assistance (PPP loans, etc.), expense reductions, and recovering fees for service and donations, many nonprofits now have more cash on hand and reserves than before the pandemic began.

But at the same time, new challenges have emerged in the form of rampant inflation and a potentially slowing economy that could reverse the tide of growing service revenue and donations. Some studies are already showing a slowing of individual giving in late 2021 and early 2022.  If there were ever a time for nonprofit boards to engage with their fiduciary responsibilities, it is now.

Of course, there will be many questions along the way that will need answering.

• What should we do with our nonprofit reserves?
• How much should be designated as “rainy-day” funds versus long-term reserves?
• Should we build an endowment or establish a board designated reserve to operate like one?
• What is the appropriate level of risk to assume?
• Are there investment options that align with our organizational values?

Each nonprofit needs to determine the appropriate level of cash reserves for its own operations. No sample policy will be an exact fit for your organization. But the following process helps outline the basic steps needed to develop an investment plan for your reserves:

Communicate with your Board & establish a committee: Many nonprofits establish an “investment committee” to focus on execution and oversight of the reserves.  In other situations, the finance committee takes on this charge.

Develop a Reserves and Investment Policy Statement: Before your nonprofit invests its nest egg in the stock market, develop a sound approach to investing assets by defining the nonprofit’s objectives for investing, identifying the nonprofit’s risk tolerance, and adopting an investment policy. This policy will act as guide to all stakeholders regarding the delegation of responsibilities, investment objectives, allowable assets, asset allocation ranges, any restrictions, and communication preferences.  Many nonprofits have separate reserves policies from investment policies, but we find it is often most practical to build them into one, cohesive policy that outlines how much you want to set aside, into what buckets, and your investment objectives for each.

Search for Investment Managers: Providing oversight for all of a nonprofit’s assets, including those that are invested, is a basic fiduciary responsibility of the board of directors of any nonprofit. Fiduciary oversight does not necessarily mean that the board handles the day-to-day investments, however. In fact, many board members prefer to engage professionals for investment management. The full board may delegate the authority to oversee the nonprofit’s investment portfolio to a professional investment advisor, who assumes the role of your co-fiduciary.

CLA’s Nonprofit Investment Advisory + Consulting Services were developed to help nonprofits fulfill their philanthropic mission and navigate through financial uncertainty by leveraging our expertise in nonprofit finance, cash and reserves management, risk management, and investing.

, Nonprofit general | 1 Comment »