Social Currency

Editor's Note: A version of this post originally appeared at the ASU Lodestar Center Blog as part of their Research Friday series.  

As we work with clients, provide workshops, and present on nonprofit finance issues across the country, one question pops up again and again: how much cash cushion should a nonprofit have? One of my NFF colleagues recently explained why the answer is different for every organization and depends on a number of factors. One rough benchmark often cited recommends nonprofits have enough cash to sustain operations for at least three months. Having less than one month of cash at your disposal is generally considered a cash crisis. 

NFF finds that organizations holding three to six months of cash have an easier time thinking long term and building up reserves: a rainy day fund, facility reserves, etc. Organizations with reserves are better prepared for an emergency (major building repairs, loss of a primary funding source, severe economic upheaval) and in a crisis it’s more likely that they can continue providing their services uninterrupted.

Earlier this year, nearly 2,000 nonprofit leaders completed our annual State of the Sector Survey. One question asked was, “How much cash (including reserves) does your organization have readily available?” Nationwide, 9% of the social service providers who responded reported having “0 months” of cash. Another 20% had enough to cover 1 month of expenses, while 34% reported that they had “2 - 3 months” of cash on hand. So the results seem to say that just about a third of social service agencies are experiencing a cash crisis, another third are managing, and the remainder has a comfortable cash cushion.

In practice, however, our consultants see a very different picture. While our survey asks about total cash, remember that many nonprofits receive funds that are temporarily restricted and thus not available for use until the restrictions are met, a process that may take many months.  We know it’s a reality that some nonprofits must occasionally borrow against their temporarily restricted funds, but when they do, they are essentially borrowing against their own future and will have to scramble to catch up.  When we exclude the cash that is obligated for specific purposes,  the reality for the bulk of nonprofits is probably more bleak than the survey indicates.

In the field, NFF staffers see many nonprofit clients who have, on average, one month of cash on hand and between zero to one month of unrestricted liquid net worth. It can be a relief for our clients to hear they are not alone in having a sustained liquidity crisis; many of their peers are in the same boat.  The real concern, however, is not what this cash crisis means for nonprofits but what it means for the communities and individuals we serve.

Think about it: if a large portion of our country’s nonprofits have one month of unrestricted cash and zero months of unrestricted liquid net assets, they are operating with no room for error—a scary scenario for the millions of people who rely on the safety net of social and human services that nonprofits provide.

What’s more, our survey also shows that demand for services is rising year over year and the resources available to fund this work are not keeping pace. Government funding continues to decline and private foundations are unable to fill the ever-widening gap. Amid these cuts in government funding, Steve Seleznow, President and CEO of the Arizona Community Foundation, sees a rapidly changing landscape for the provision of social services. Says Seleznow, “It's healthy for government to cut fat. It hurts to cut to the bone but you can make do—however, governments are now amputating entire social safety net programs, and they'll never grow back.”

If that isn’t an incentive to change our practices, what is? Practitioners in the field continue to seek new methods for fundraising, but that’s only half the battle (and it won’t solve the perpetual cash crunch). In order to meet our long-term mission goals, we also need to reexamine our financial management strategies. Some of America’s most vulnerable residents are counting on us.