Cash Management Opportunities and Needs for Nonprofits in Today’s Unique Landscape

Cash management within nonprofit organizations has always been an important topic, but especially in today’s climate. First, since COVID, many nonprofits have a higher cash balance than in previous years with the influx of funds from the paycheck protection program, employee retention credits, and other government and philanthropic funding. Second, the recent developments in the banking industry have stressed financial markets for investors and depositors and raised many “how is our cash” questions from boards and management alike. Third, increasing interest rates can create opportunities to earn interest but also make borrowing more expensive.

This landscape creates both an opportunity and need for nonprofit leadership to review their current cash management policies. Here are some risk-mitigation strategies to consider as part of the process:

• Review your current cash and investment accounts. Consider reducing your risk by diversifying your accounts among multiple institutions or vehicles. 
• Consider bank “sweep” programs in which funds above $250K are moved temporarily to other banks or money market funds where they retain FDIC protection and possibly provide for increased rate of return.
• CDs are an option and provide increased interest rates over traditional savings accounts, though they tie up cash for a period of time, so liquidity will need to be considered.
• Short-term treasury bills can be a good fit for many nonprofits as they provide higher liquidity and interest rates often above that of CDs. Treasury bills are also supported by the US government. 
• Maintain/establish a cash reserve or a “rainy day” fund for unforeseen circumstances and emergencies. A rule of thumb is a cash reserve for 3-6 months of operating costs, though it will vary based on the certainty and cycles of a nonprofit’s funding inflows.
• Establish an investment strategy. Given the current nature of short-term interest rates, nonprofits should at a minimum consider safe and liquid options for cash besides a checking account. But it is also important to consider just how much cash is really needed and if there are opportunities to fund other longer-term initiatives beyond an operating reserve.

While the above strategies address reducing concentration risk and increase returns on cash, they do result in more complex cash and investment structures. As a result, it is also important for nonprofit management to review internal controls around these areas. By diversifying cash resources, nonprofits can better weather economic downturns and unexpected circumstances while sustaining their programs and services over time.