Cash Reserves: Too much of a good thing?

March 15, 2014

Warning: this post could be annoying, and should be filed in the “nice problems to have” folder. Recently I was speaking with a client about their cash reserve. I thought it was too big. He suggested I sounded a bit like Paul Krugman, and I took that as a complement.

Funders, donors, and non-profit finance professionals have worked diligently with social change organizations for years to help them understand basic principals of capitalization and expand definitions of non-profit capitalization but not enough attention has been paid on how and when to put capital to work.

Any executive director (or CFO) who has agonized about making payroll much less been through a recession, or had a key funder pull the rug out from under them will rightly advocate for a substantial rainy day fund. And I have no argument with that.

And given the variety of non-profits, and the variety of business models, I am not prescriptive about whether the stockpile of unrestricted cash should equal 3 months of operating expenses or 6 months, or be equivalent to the largest grant or all the anticipated contributions for the next year or some other generic formula.

However, there is a fund balance over which money sitting in the bank not-working means that an organization is not pursuing its mission effectively (the raison d’etre let’s remember) and it’s ability to further grow revenue and capacity is impaired too.

Simply put, the cash reserve focus is healthy up to a point, but beyond that point it’s a penny-wise pound-foolish strategy to keep growing it at the expense of higher value investments.

Such investments could include:

  • Paying a key staff member more money so they don’t leave and cause your organization to backslide and incur the added costs of conducting a search, retraining and likely end up paying the new hire more money anyway.

  • Paying for capital improvements or upgrading technology now so more work and more programs are run more efficiently sooner rather than later.

  • Developing a Board investment policy and putting a portion of the funds in a higher-yield (though potentially higher risk) investment account that may generate income given that savings accounts and even most CDs today earn less than the rate of inflation. [Note: if an organization truly has amassed a major war-chest or has received a very large gift that it knows it won’t spend in the short term establishing an investment policy and discussing whether the time is right to create an endowment is well worth it].

  • Adding new staff to grow a successful program or to liberate high-performing but currently over-worked staff members from tasks that are on their desk but pulling them away from the work that they are uniquely able to do or that is most important to the organization’s success (for example an executive director who is chronically putting out internal fires at the expense of cultivating external partnerships).

Clearly the decision to spend hard-won savings is not to be taken lightly. And a commitment of funds to recurring costs – like a salary increase or new staff hire – is of different magnitude than a one-time purchase of a new computer.

However, given that mission centric organizations do not exist to pay shareholders dividends, it’s vital that social change organizations don’t sacrifice their ability to make more of a difference today out of an over abundance of concern about their ability to make more of a difference tomorrow, especially when spending more now may mean they can do both.