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Policies and Procedures: Cash Reserve Policies and Considerations for Cash Management

Picture of Melodi Bunting

Melodi Bunting

Nonprofits operate in a complex market full of near-constant challenges and changes. Technology advances, an uncertain economy, changing donor actions, and an increasing demand for nonprofit services are just a few examples of the trials nonprofit organizations have faced in recent years. As we’ve covered before, one of the best ways to minimize the potential negative impacts of these fluctuations is by maintaining effective and up-to-date policies and procedures for your nonprofit. Financially strong nonprofits are better equipped to adapt and proactively respond to change. In this market, the availability of resources, especially cash, and strong cash management practices are key elements of financially strong nonprofits.

Cash Management

Cash management practices include effective and efficient use of resources and maintaining liquidity to maximize mission impact. As you begin to construct the unique cash management and cash reserve policies for your organization, consider the following:

  • Maintain sufficient cash reserves.
  • Prepare a cash flow forecast to analyze the timing of inflows and outflows of cash.
  • Monitor actual cash flows compared to the forecast to identify and proactively respond to unplanned fluctuations.
  • Utilize cash management tools and technologies to optimize efficiency of financial processes.
  • Establish and monitor policies and procedures for cash receipts and cash disbursements.
  • Assess impact of growth, market changes, and availability of funding sources by regularly reviewing the revenue mix.
  • Enhance donor confidence by demonstrating financial accountability and transparency.
  • Secure a line of credit to mitigate identified financial risks.
  • Create a buffer against unexpected changes.
  • Provide stability for covering expenses.
  • Provide for quick and efficient response to natural disasters, public health emergencies, or other crisis.
  • Inspire confidence and attract ongoing support from donors by demonstrating financial sustainability.
  • Enable strategic initiatives and funding for capital projects.

Cash Reserve Policy

When establishing or updating a cash reserve policy, the board should consider the organization’s risks, variability of cash flows, and critical expenditures. This information supports four primary areas of the policy.

  1. How much money should be in the reserve. Operating expenses or the budget often serve as the basis for the calculation. Annually the board should review the basis of the calculation to determine if the amount should be updated.
  2. When and how can funds be used. This may be triggered by the available cash level and timing of critical expenses like payroll. This should also include the specifics of the processes such as does the board have to approve or can the executive director initiate use.
  3. How and when will the repayment of funds occur.

By implementing these strategies and practices, nonprofits can optimize cash management, maintain financial stability, and support their mission-driven activities effectively. If your nonprofit is looking for help establishing and implementing a cash reserve policy or other various policies and procedures, reach out to our Nonprofit Advisory Services team. Our experts have decades of experience serving a diverse variety of nonprofit organizations, and they will be able to help you build a manual that echoes the goals, culture, and mission of your specific organization.

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