Three Lessons for Nonprofits in Times of Financial Uncertainty

The most recent financial crisis in the U.S. has exposed many vulnerabilities in nonprofit financial management. News of bank failures and fear of more in recent weeks has once again emphasized the importance of sound policies surrounding cash management and risk. Due to restricted reserves, advanced funds, and endowments, nonprofits in particular need to focus on the potential risks.

To help nonprofits prepare for future crises, here are some lessons learned from the tumult of the last three years.

Protect, Diversify, and Plan

The beginning of the global COVID-19 pandemic was wrought with uncertainty. Beyond the impact on our personal lives, no one understood the myriad ways our professional lives — and how we do business — would change. The most immediate impact was the almost overnight elimination of in-person events. For organizations that relied heavily on event attendance, this was devastating.

Lessons learned:

• Do ensure any contract you sign includes a force majeure clause — this protects your organization from financial liability in case the event cannot happen due to circumstances outside of your control. Although this does not provide unlimited liability protection, it proved essential for many organizations. Ask questions about what is (and what isn’t) protected by this clause.
• Do structure your organization’s activities and programs so there is revenue diversification. Relying too heavily on any one revenue source can be detrimental to an organization.
• Don’t assume leadership or board members are planning for scenarios where revenue diversification is necessary. Don’t be afraid to question leadership if diversification is not deemed a worthwhile goal.

Set Goals, Monitor, and Keep Your Head Up

In response to uncertainty, the Federal Reserve Board (the central banking system of the United States) started lowering interest rates to stimulate the economy. In this environment, investing cash reserves became less important for organizations. When interest rates are near zero, putting money in an interest-bearing financial instrument is not hugely impactful.

Lessons learned:

• Do make sure your organization has sound investment and reserves policies that outline your organization’s financial goals, both long and short term. Board members have a fiduciary responsibility to be good stewards of the organization’s funds. To be proactive rather than reactive, it’s essential to set goals and have a plan in place.
• Do ensure there is a committee to monitor the policy and the organization’s adherence to said policy. There should be required check-ins, reports back to the board of directors, and regular communication with the organization’s financial/asset manager.
• Don’t fixate solely on the current national financial situation — you should also consider historical trends. Knowing financial trends are cyclical, frame your thinking around where you are within the current cycle and how you can protect your organization during downswings while securing resources for future upswings.

Assess Risk, Explore Opportunities, and Be Responsible

In recent months, the Fed has increased interest rates at a rapid pace. This, along with other events, led to the failures of Silicon Valley Bank and Signature Bank which highlighted a specific area of concern for nonprofits: reliance on large balances at regional banks.

Lessons learned:

• Do ask your bank representative about your risk based on your account balance. Make sure you understand your financial institution’s focus and who they cater to. If their focus is on a particular industry, if they specialize in particularly risky financial instruments, or if they cater to a particular transaction focus, this can highlight areas of risk to your organization as well.
• Do explore opportunities for cash management solutions that will protect your organization. Sweep accounts often offer protection over and above the typical FDIC limit of $250,000 per entity per institution, but you need to ask and make sure you understand what these protections are.
• Do consider a third-party cash management solution as a possible option for additional FDIC protection.
• Don’t assume your money is fully protected at one institution. This is often not the case. Proper stewardship of funds means you ask questions of your financial institution to understand exactly how much risk you have. Check this against your investment and reserves policies to verify that your organization is protected.

As our world settles back into a new normal of doing business, it’s critical that we use these lessons from the past to protect our organizations and our ability to continue our important work.