Nonprofit 411: The “Bucket system” for Nonprofits: Managing Cash and Investments

By Joel Aronson, CPA, PFS, MBA, Partner AAFCPAs Wealth Management 

Cash may be king, but nonprofits need to ma41133ke certain their money is working as hard as it can – for today and for the long term.  Cash on the books can open the door to a cash management plan and perhaps even an investment strategy that will help keep the future as secure as the present.

Keeping the door of opportunity open requires a shift in the traditional non-profit mindset.  How to make that shift? You can begin by adopting a “Bucket system” that separates cash reserves into three categories, each of which requires its own cash or investment strategy: working capital, stability and other reserves, and long-term investments.

Working capital is critical: your organization requires adequate funds to operate on a day-to-day basis.  There is no “one size fits all” approach to managing those needs, – the amount required depends on how your nonprofit earns revenue.  If funding comes via annual subscriptions or tuitions, your “working capital” bucket may be full at the beginning of each fiscal year.  For those with a fee for service model, it may take you more time to fill that bucket.

When there is enough cash to cover more than immediate operational needs, organizations can begin to develop stability or other reserves.  These reserves are critical to long-term health, and they can mean the difference between resiliency in rough patches or being forced to wind down. Your Strategic plan should have a strong focus on reserves, allowing your organization to be sustainable, to grow, and to someday be in a financial position to invest with a longer time horizon.

Once working capital and other cash reserves have been designated, nonprofits can now begin to consider strategies for funds that may not be needed for 3 to 5 years or longer. These funds can function as an endowment with an objective of providing an annual funding source for operations, as outlined in a spending policy.

Before starting a long-term investment account, though, leadership should weigh the size of the portfolio against the work and cost it will take to manage the effort.  Investments can require some heavy lifting in terms of administrative maintenance and investment oversight, as well as administration fees; organizations should determine a balance between operational costs and the ability to provide meaningful annual support. Ideally, a portfolio will contribute 4 or 5 percent of its total principal value to the spending budget each year.

As growing nonprofits become more sophisticated in terms of operations and cash flow, they face the exciting proposition of evolving how they manage their money.  Executive Directors and Boards can begin changing their perspective; they move from the question of cash management (“how do we optimize our cash on hand?”) to that of investment management (“how do we expand existing assets into a reliable source of annual funding?”). By creating buckets for working capital, reserves, and long-term investments, nonprofits can build on stability with investment income that sets the stage for continued growth.