Charitable nonprofits are not usually in the business of accumulating capital. In the upside-down world of philanthropy, organizations with cash on hand can be a turnoff to some donors. Until someone who prioritizes resiliency goes looking for operating reserves. Or really thinks through how to put out a fire (program expense) without a hose (administrative expense).
Pooled Special Needs Trusts (PSNTs), charitable nonprofits who are also fiduciaries, have an obligation to their beneficiaries to have both operating reserves and a reserve policy. Based on SNFSi data, nearly half of the PSNTs who disclose financials have nine (9) months or more of capital available as operating reserve (unrestricted net assets).
Shannon Crowley, CPA, MSA, of CliftonLarsenAllenLLP joined SNFSi at a recent member event to talk about reserves and reserve policy for PSNTs.
Industry-specific factors to consider in determining the amount to designate as operating reserve include:
- Assets in the trusts’ investment pools are exposed to the capital markets, which can cause fluctuations in asset-based revenue during periods of market volatility. Other assets may be exposed to capital markets as well.
- Expenses can be difficult to cut quickly in response to changes in revenue, given the work that PSNTs do.
- I would add that prudent business continuity planning, including disaster recovery, suggests that time may also be a consideration, specifically the amount of time that would be required to move the trusts under administration to another trustee.
Steps to take to formalize an operating reserve include:
- Establishing a multi-year financial forecast
- Running scenarios on that forecast (good, neutral, yikes) to determine the magnitude of a potential expense gap
- Creating a written reserve policy
- Revisiting that policy at least annually
- Establishing a separate operating reserve account for clear bookkeeping and analysis
- Investing that operating reserve such that it is accessible
Elements of a reserve policy include:
- Definition and goals
- Authority to use
- Reporting and monitoring
- Relationship to other policies
- Review of policy
The Nonprofit Finance Fund reports data showing that fewer than 25% of nonprofits had more than 6 months of cash reserve, and close to 10% had less then 30 days of cash on hand. PSNTs as a group report better numbers, which is positive.
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