Reserves

June-July 2017

Using Your Money (Opinion)

Not-for-profits are generally cautious when managing their money, for a number of reasons. Firstly, the money doesn’t belong to any one person, so the people managing it are doing so on behalf of a group of people, such as the beneficiaries or members of the organisation.

Secondly, the dynamics of committee-based decision-making usually favours a conservative approach. It only takes one person to disagree with a spending proposal, and the committee as a whole will try to find a compromise rather than vote that person down.

Thirdly, many organisations depend on grant money that has to be re-applied for annually without any guarantees, or government funding that changes when someone in Wellington comes up with a new idea. These groups want to have a bit of a buffer.

To get an idea of where you stand you can take your total cash balances (i.e. all bank accounts, term deposits, investments etc.) and divide them by your total expenditure for the last 12 months. This is also called the Reserves Ratio, and it gives you the number of years that your organisation could survive if all income streams would stop today. For most not-for-profits a good reserves ratio is somewhere between 0.5-1.5 years. In general, the more income you generate yourself, and the more diverse your sources of money are, the less security you need and the lower your Reserves Ratio can be while still being secure. If most of your income is from a single source, you want to aim for a fairly high Reserves Ratio.

For organisations that are highly grant dependent, the Reserves Ration will fluctuate wildly during the year and is best compared year-on-year rather than month-on-month. For such organisations an ‘Untagged Funds Ratio’ can be used: Calculate your untagged funds by adding up all your cash and investment assets as above, and then deducting the part of this which is tagged for specific purposes or expenditure items through grant funding. Divide this by expenditure in the last 12 months. You should have a couple of months’ worth of untagged funds, preferably up to half a year or so (so a ration between about 0.2 – 0.5).

While there are a lot of organisations struggling to build or maintain appropriate reserves, I am also seeing quite a few with quite significant reserves. These organisations usually continue to run surpluses each year, further adding to those reserves.

I think this money should be used. User or membership fees could be reduced, or a higher level of service could be offered. Sometimes organisations want to build reserves high enough to generate investment income, but this cannot be achieved with a conservative strategy essentially consisting of term deposits. At current rates, $100,000 in term deposits will generate all of $3,500 in additional income for you in a whole year. But the same $100,000 would give you about two whole years of fulltime employment, perhaps to provide services to a group of people sorely in need of your attention. Doing so may also trigger some permanent growth – good outputs create further funding opportunities.

Food for thought, maybe.

Harald