Lessons for EDs

Don’t Wait for a Crisis to Talk About Your Cash Reserve

by Joan Garry

I’ve watched too many nonprofit boards make fear-based decisions in moments of crisis because they waited until the pressure was on to have the hard conversation. The time to decide how your reserve should be used isn’t during the tsunami. It’s long before the storm arrives.

A plant grows out of a pile of coins, symbolizing how something bigger can grow from your organization’s cash reserve.

I have big feelings about cash reserves. I have big feelings about how important it is to have one, how big it should be, what it should be used for, and who decides how it is used.

Why are my feelings so big?

Reason #1

Well, I began my tenure as an executive director with NO CASH IN THE BANK. Well, it wasn’t zero. It was $360. Better, right?

I had come from corporate America and was both horrified and fiercely committed to fiscal sustainability. So as soon as I paid off the ancient accounts payable and somehow managed to avoid layoffs, I built reserve funding into our annual budget. Our revenue budget included a monthly deposit into the reserve account, and we continued to do that until we reached a number that represented six to nine months of operating expenses. As the organization grew in size and impact, we added a bit more to allow for investment in a new project – a way to fund innovation. 

When I stepped down 8 years later, the reserve was in the seven figures. Five years later, it was gone.

Needless to say, I have very big feelings about how the board and CEO managed that reserve (or didn’t).

Reason #2

The scarcity mindset haunts the nonprofit sector in oh so many ways. I could go on about it, but let’s stay focused on reserves. 

Far too many boards come to every decision from a place of scarcity. And one place it rears its ugly head is when decisions need to be made about how and when it is used. Here are two real examples.

Exhibit A

An organization has a very healthy reserve. The board had developed a policy that bequests go into reserve. The rationale wasn’t bad – build the reserve with significant unexpected gifts. As a result, the reserve was more than healthy. Meanwhile, a significant funding stream was hit hard, and the organization was headed for a deficit. The board pushed for a layoff plan, and efforts on the part of the executive director to tap into reserve funds were rejected.

Exhibit B

Another organization had a healthy reserve, built over six years following massive financial challenges. Folks who had been on the board at that time had big feelings too (but different big feelings from mine). They wanted to hold onto every last dime for dear life (they still make dimes, right?) The rationale here was that the reserve was for a rainy day.

The executive director made the case for a new position/program that was not budgeted and requested the use of the reserve to fund the addition. This organization (like many) advocates for a community that is seriously under attack, and that community needs bold action.

The board votes it down with the rationale that it is for a rainy day. The board was right. It was not a rainy day. It’s actually a tsunami.

Again, big feelings.

Exhibit C

An executive director has some one-time costs that are higher than budgeted.  This leader, like many, has a drive to get an A on their book report. They also suffer from the implications of a scarcity mindset.

The E.D. does not even ask before cutting back on expenses.

Big feelings. But now it’s time for me to turn all my big feelings into advice. 

The Big Headline:  

TALK ABOUT ALL THIS BEFORE THERE IS A TSUNAMI OR BEFORE A NEED FOR UN-BUDGETED FUNDS FOR BOLD ACTION:

The time for this conversation is BEFORE “it” hits the fan.

A Conversation Guide 

  1. Be sure your reserve has a minimum of six to nine months of operating cash on hand at all times. In addition, agree on an amount that goes into reserve that could be used for programmatic investments.
  1. Have a real conversation about under what circumstances money can be drawn from the reserve.
    • What about a short-term cash flow timing issue when you are quite certain the money will go back into the reserve? (Ex: Have to pay for the venue for the gala well in advance of ticket sale revenue.)
    • What if you miss your fundraising targets? Do you cut or draw? Is there a difference between missing your targets and something totally out of your control (government funding pulled)?
  1. Create a policy for reserve cash withdrawals. It should be stringent, and the board must be the decider, not the executive director. You can’t assume you will always have a fiscally responsible E.D. 

Finally (saving the hardest one for last)

The board and senior staff need to have a discussion about risk tolerance. Board members need to check their anxiety about fundraising at the door and remember that their job is not just to make sure nothing goes wrong but to ensure that the organization has what it needs to thrive. Its role is to help the staff think big, rise to the moment, and be bold when necessary.

It will be hard. Risk management is ingrained in so many board members, and of course, that is important. But you didn’t get into this line of work to avoid risk.

So lean in, be smart, and yes, be bold. That’s how you change the world.