How Nonprofits Can Successfully Navigate the Current Financial Environment

How Nonprofits Can Successfully Navigate the Current Financial Environment
Topics InvestingNonprofit Investing

Nonprofits are facing new challenges in the current financial environment. Between market volatility, inflationary pressure, the unpredictable behavior of donors and the general financial anxiety of board members who are concerned with keeping the organization on track to meet a year-end budget, there’s a lot to worry about–but there are also opportunities to rely on best practices to position organizations well for the future.

Many smaller nonprofits experienced the pandemic as, first, a great technology challenge; many organizations did not have the technology to just send people home to work. Others relied on in-person elements to their programs and had to adapt quickly, searching for technology solutions. These efforts were helped by both the availability of largely forgivable Paycheck Protection Program loans and eager donors who felt a sense of urgency about their charitable giving in 2020 and 2021.

As the pandemic continued, however, nonprofit balance sheets began to look healthier; indeed, many organizations are in a better position today than they ever have been before. Below are a handful of the most common challenges facing these organizations now – and what to do next.

Putting Excess Cash to Work

With healthier balance sheets, organizations may be in an unfamiliar position. Many are seeking guidance about what to do with funds that aren’t necessarily long term but also won’t be spent in this year’s operating budgets. With deposit accounts not paying much interest and neither bonds nor equity investments looking especially rosy, a thoughtful strategy requires a precise assessment of how soon the organization may need to tap portions of the money before putting it to work.

Upskilling the Board

Board members with more specific expertise–in HR, governance and risk management especially–are highly sought-after as organizations wrestle with the challenges of a new era. Keep a board matrix of member skills and demographics, noting key talents and characteristics essential to the success of your mission, and fill gaps as they emerge. The wisdom of life experience can be very valuable to boards, so don’t discount prospective members who don’t have specific professional qualifications.

Asset Allocations that Meet Long-term Needs

Many investment committees are still most familiar with the 60/40 portfolio as the nonprofit gold standard. They may need help discerning between investing for individuals (with which they’re usually most familiar)–who retire, die and have heirs–and nonprofits, who need both reliable, predictable year-to-year income and long-term growth. Educating the Board can be key to ensuring it makes the right investment decisions, and your investment manager should be able to offer helpful sessions to this end. Also consider how your investments align with your mission and whether a socially responsible strategy might help your organization achieve its goals. In the current environment, ensure the investment strategy considers inflation risk but also puts it in an appropriate short-term perspective.

Preserving Liquidity in Emergency Funds

If organizations need, as the best practice says, three to six months of emergency cash on hand, what’s the best way to manage it to ensure access to liquidity as needed while still maintaining purchasing power in the current interest rate environment? Consider augmenting deposit accounts with lines of credit and laddered bond portfolios, among other strategies.

Gifting With Non-Cash Assets (especially cryptocurrency)

Cryptocurrency is the new buzzword in major gifts circles – but many organizations don’t know what to do with it. Even in the absence of a specific donor offering a specific gift, they want to prepare. The right step is counter-intuitive: wait to see which cryptocurrency a donor is offering, then set up a wallet and begin the transaction. Assess the donor to ascertain how likely they are to go forward with the gift at the outset. To prepare, make sure your gift acceptance and investment policies are up to date.

In these key areas, taking action now sets up future successes for your nonprofit. Maintaining your strengths in the current economic climate helps your organization get ready for future growth.

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