New research from accounting firm BDO shows that the nation’s nonprofits are struggling with something businesses know all too well—liquidity crunches. The firm’s recent study found that nonprofits have liquid unrestricted net assets amounting to an average of 8.7 months of operating reserves. However, some 40 percent maintain between one month and less than six months of reserves and almost a quarter of health and human services organizations surveyed for the report don’t maintain any operating reserves at all. According to experts, this offers corporate giving programs a chance to direct funding to an area that is too often overlooked—with potentially dire consequences.
According to Laurie De Armond, national co-leader of BDO’s Nonprofit & Education Practice, the data show a charitable sector that is quite vulnerable if a major economic downturn took place.
“Without adequate operating reserves, nonprofits can’t weather uncertainty in their funding streams or other things that could threaten their programming,” De Armond said.
Certainly, the last major recession caught a lot of nonprofits off guard, and many saw donations dwindle. But now that charitable contributions are back near record levels and the economy seems on track, other changes in the political landscape still threaten nonprofit cash flows, she said.
Many organizations rely heavily on government grants, for example, and the current administration seems intent on cutting some funding that previously had seemed stable. Add to that governments on all levels cutting back on their own social services programs, and nonprofits could be facing increases in demand for services along with cuts in government funding.
Having sufficient reserves on hand to handle these scenarios—doing more with fewer resources—is critical, she said.
Adequate cash reserves are also vital when it comes to strategic planning, she said. When a charity goes through the strategic planning process and identifies activities and changes needed to solidify and expand the capabilities of the organization, they will need to draw on operating reserves to put such plans into motion.
“One of the biggest risks nonprofits run in having too little in operating reserves is not being able to invest in themselves. They need to have a stable footing so they can run their programs into the future instead of just addressing their immediate needs,” she said.
While the data show a need for more liquidity, just how much is needed is tough to say, according to De Armond.
“Because of the diversity of the nonprofit sector, it is difficult to pinpoint, but a minimum of six months of operating reserves is a good benchmark, and 12 months would be even better,” she said.
Many organizations struggle with squirreling away so much of their funding, De Armond said, because grantmakers and individual donors often want their contributions to go directly to a specific program that has caught their interest and support—the opposite of the for-profit business world, where customers don’t have a say in how a company uses the revenue it generates. Nonprofits, though, are frequently beholden to the wishes of their donors—the source of their revenue—and are hamstrung when it comes to stashing money in a reserve account.
In addition, many nonprofits are critiqued by donors based on the percentage of their funding—often rather arbitrary—that goes directly to programming. When donors see that proportion shrinking, it can give them second thoughts about continuing their support—even though the funds were going toward long-term sustainability and capacity building.
Corporate philanthropists—who have a keen understanding of the critical importance of cash flow and operating reserves—can help resolve these challenges by increasing the proportion of their grants that are unrestricted, De Armond said.
“Reserves are built using unrestricted operating support, and that’s what nonprofits need more of,” she said.
That cushion to weather changes in demand for services and drops in donations and grants, while putting in place the resources needed for long-term capacity building, will pay dividends down the road, she said.
For more information, visit the BDO Institute for Nonprofit Excellence at bit.ly/2rVUBvL or contact De Armond at firstname.lastname@example.org.