Balancing the Mission Checkbook

Nonprofit board members are asking what they should do – specifically to help organizations navigate the economic mess. BoardSource recently published Facing the Financial Crisis: 10 Smart Things Your Board Can Do Now. The article offers a solid, strategic perspective for boards. I have some supplemental words of advice for each individual board members – three steps for board members to consider in a downturn.

1. Step out

Step out of the familiar and comfortable role of supporter and cheerleader.

Now is the time to ask important questions about impact, effectiveness, and entrenched practices. Board members can often bring the outside viewpoint required to ask the right “why” and “what if” questions.

Some of the most important questions to ask right now are about budget assumptions. Any significant revenue number in the budget needs to have a good plan and rationale, not a wish and a prayer

2. Step back

Step back and let the staff do their work.

I have seen boards get carried away generating ideas for new reports, analysis, and research without considering how much time it would take the director and staff to complete the work required to follow through on the ideas. The board chair is the moderator of this balancing act, making sure that every new task suggested by the board is weighed against other priorities and internal capacity.

I urge particular caution for board members who suggest that the nonprofit start a new way of raising funds. If you’ve never hosted a fundraising event, or carried out a significant individual donor campaign, this might not be the time to divert staff time and effort. Remember that each type of income is essentially a new business.

3. Step off

Step off of the board if you do not have the time or energy to work hard for the next two years.

This is not going to be easy and nonprofits need to have the right people on the board. It’s nothing personal, but it’s a good time to ask yourself if you can commit to this organization.

I’m pretty sure that every nonprofit would love to have enough money that some of the funds can be invested for the future. In the past month, though, nonprofits may have seen their investment portfolios buffeted by the markets. If that wasn’t enough of a concern, this week we read about losses for some local nonprofits from investments related to the Petters Company fraud case. News reports this week in both MinnPost and the Star Tribune describe the negative impact on organizations that may lose millions from investments that were made to provide short-term loans to companies for inventory purchases. As Scott Russell said in the MinnPost article, these cases are “a wake-up call for other nonprofits to review their investment policies and portfolios.”  As an outside observer, it’s easy to say that these investments seem like an unlikely fit for a nonprofit organization, but we don’t know what standards or criteria those boards were using to evaluate and select investments. This is a good time, though, to review some fundamental guidelines for investments by nonprofits.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.

Cash is cash, right? Then why are so many nonprofit directors and board members suddenly so concerned about the safety and security of their bank accounts?  All it takes is one alarming story, such as today’s report that some Minnesota private colleges couldn’t access all of their short-term funds. It sounds like the funds will be available, and how would you feel if you couldn’t arrange a transfer of some funds that you consider to be “liquid?”

So how concerned should you be? In general, you shouldn’t panic, but you also can’t make assumptions that all is well just because you haven’t had a problem before. It depends on how your short-term cash accounts are actually invested or deposited. Many nonprofits have balances of funds that are needed for payroll and regular expenses, for reserves, and to hold funds that are restricted or designated for a specific program or purpose. It’s common to have a checking account, other bank accounts, and some money market funds or short-term investments.

However, over the last 20 years the distinction between keeping funds in a bank account and a range of other investment options has gotten pretty fuzzy. We’ve become a little lazy about using terms – like money market account, money market fund, and short-term investments – interchangeably. But they are not the same.  Your first priority is to find out where, in fact, your nonprofit’s cash balances are – do you have a bank account or a mutual fund? If it’s a bank money market account deposit, what is the FDIC insurance coverage? Some banks offer a service to provide additional coverage or work with other banks to enhance the coverage by exchanging funds within a network. If your funds are invested in a money market mutual fund, it’s wise to read the prospectus or other information from the fund manager to learn about the types of investments that are owned by the fund. Money market funds range from ultra-conservative investments in treasury bills to investments with a little more risk. If you have made direct purchases of short-term investments, read up on what you have and how those investments are valued or affected by the current market.

Again, know what you’ve got and then have a discussion with the finance committee about any risks, concerns, or restrictions. Then you can decide whether to make any changes. This might also be the trigger for you to re-visit or create an investment policy and educate yourself and the finance committee on fiduciary duties and nonprofit investment practices. I highly recommend a short book published by BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.