“Well, how much cash should we have?” a client asked during a recent Board meeting. Scott and I explained that an organization should have at least a 3 month operating cash reserve (90 days of cash), and aspire to a 6 month cash reserve (180 days of cash). In keeping with statewide best practices, it was absolutely the right answer.

Still curious, our client inquired, “According to whom should we have 3 months of cash on hand?” And there you have it – the question that kicked off in each of our minds the need to move beyond conventional wisdom and arrive at an empirical explanation as to why nonprofits should maintain at least 90 days of operating reserves. Or should they?

Logically, the next step in our thinking was to obtain a national sample of nonprofit financials to begin our analysis. We turned to the National Center for Charitable Statistics (NCCS) for our figures, and obtained financials for over 230,000 U.S. nonprofit agencies.

As you may have already guessed by now, our empirical findings call into question whether or not a 3 month cash reserve is a realistic guideline for all nonprofits to follow, indiscriminate of an agency’s size or mission. For starters, out of the 230,759 nonprofit organizations we examined, the median number of days cash on hand was approximately 75 days, with 25% of the upper distribution (top quartile) holding 187 days of cash or more, and the lower distribution (bottom quartile) holding 19 days of cash or less.

Further, an agency’s unique mission and size illustrate why it’s arbitrary to apply the 3 month cash operating reserve to all agencies without taking into account these important characteristics. For example, to ask that a human service organization target a cash reserve of 180 days seems unreasonable given that the median number of days cash on hand for an agency with such a mission is 62. Additionally, we can see that arts organizations should attempt to grow a cash reserve in excess of 90 days since that is the empirical “norm” finding. We encounter similar difficulties when analyzing cash operating reserves by organizational size (operating budget).

Days Cash on Hand by Mission TypeIn the final analysis, we recommend you benchmark your agency relative to organizations of comparable mission, size, and even location to assess your financial health. This is something we can do for you with our statistical data analysis as part of the Bayer Center’s Financial Wellness Package.

Only when you are fully aware of your internal financial performance (trends) and external positioning (benchmarking) can the Board and senior management truly begin to layout a realistic and informed cash reserve policy, one that is both realistic and in line with peer organizations.
Days Cash on Hand by Budget Size

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Over the last six months, Scott Leff and I have observed a greater proportion of nonprofit Boards seeking clarification of their agencies’ finances – distilling the important and necessary financial information into a condensed report – and financial health. With that in mind, the Bayer Center recently unveiled a set of diagnostic tools that we are calling our “Financial Wellness Package.” To borrow a little medical parlance, we liken it to a “financial check-up” with your friendly Bayer Center consultant.

One piece of our “Wellness Package” consists of looking at your agency’s financial performance relative to organizations of similar mission and (budget) size. As a part of this analysis, we analyzed close to 240,000 nonprofit organizations that filed 990 information and calculated numerous financial performance ratios as one approach towards answering the Board question: “How financially healthy is my organization?” We refer to these figures as our “Financial Benchmarks.”

Originally, we had just planned to use the benchmark results as one component in our Wellness Package, and thought nothing of the broader sector implications that could be gleamed from our analysis. However, after further review and discussion, we’d like to share with you some of the broader takeaways we discovered that may influence how you think about your agency’s finances and where you stand relative to peer organizations of mission and size.

We look forward to sharing some of these findings with you as we all continue to seek and share industry best practices. Stay tuned…