Nonprofits often face the challenge of balancing immediate financial needs with long-term sustainability. A well-designed policy for managing funds across various accounts—typically categorized as cash, operating reserves, and long-term assets—can help ensure stability, liquidity, and future growth.

Some organizations may include additional buckets like designated funds or capital reserves, but most nonprofits thrive with a framework focused on immediate, short-term, and long-term assets. This article outlines how nonprofits can create such a policy, including how much to allocate to each account when to move funds between them, and the key benefits of implementing a formal policy.

Allocating Funds: How Much in Each Bucket 

A nonprofit's financial health depends on striking the right balance across key financial "buckets." These include cash for immediate needs, operating reserves for short-term stability, and long-term assets for growth. Some organizations may also have specialized buckets such as designated funds (set aside for specific projects) or capital reserves (for large-scale investments like facility improvements). Still, the principles of fund allocation remain consistent across most nonprofits.

• Cash: This bucket ensures immediate liquidity for daily operations and unexpected expenses. Cash should be invested conservatively in liquid accounts such as checking, savings, or money market funds. Commonly, nonprofits maintain about three months of operating expenses in cash, depending on their cash flow cycles.
• Operating Reserves: Operating reserves provide a financial buffer for short- to mid-term needs, such as covering a budget shortfall or responding to emergencies. These funds are typically invested with a low- to moderate-risk profile, prioritizing stability while balancing income and liquidity. Nonprofits often target reserves that cover several months up to a year of operating expenses, depending on the organization’s risk tolerance and funding predictability.
• Long-term Assets: Long-term assets are allocated to ensure future financial sustainability and support growth. These funds are typically invested in a diversified portfolio that can tolerate higher market risk, including equities, broad fixed income, and potentially alternative investments. Only funds not needed for immediate or short-term purposes should be allocated here.

Framework for Moving Funds Between Accounts

A well-crafted policy should define when and how to move funds between the cash, operating reserves, and long-term asset buckets, ensuring that resources are used effectively in line with the organization’s goals.

• Cash to Operating Reserves: If cash balances regularly exceed the 3-month target, excess funds may be transferred to operating reserves to prevent an over-concentration in low-yield accounts.
• Operating Reserves to Cash: When operating expenses or emergencies draw down the cash account below target levels, funds should be moved from operating reserves to restore liquidity.
• Operating Reserves to Long-term Assets: If operating reserves exceed their target (e.g., more than six months of expenses), excess funds may be invested in long-term assets for better return prospects and future growth.

Decision-Making Authority and Review Standards

The Finance Committee, in conjunction with the nonprofit management team, is typically responsible for reviewing fund balances and recommending necessary transfers. Significant fund transfers may require Board of Directors approval. Results of the review and any major fund movements should be reported to the Board, ensuring transparency and alignment with the organization’s goals.

Nonprofits can ensure that funds are moved efficiently by regularly monitoring these accounts—typically on a quarterly or semi-annual basis—and setting clear decision-making authority within the organization. In addition to immediate- and long-term considerations, organizations may also decide to review how designated or capital reserve funds fit into the broader strategy.

Benefits of a Fund Movement Policy

Implementing a formalized policy for managing fund transfers provides benefits that contribute to the financial health and stability of the organization:

• Tailored Investment Strategies: Each bucket has a specific investment strategy aligned with its purpose and investment time horizon, allowing the nonprofit to optimize returns while maintaining necessary liquidity.
• Liquidity and Financial Stability: Ensures sufficient cash for immediate needs while protecting the organization from financial uncertainty and allowing for smoother management of emergencies or revenue shortfalls.
• Growth and Sustainability: Excess funds can be channeled into long-term investments, promoting the organization’s long-term financial growth and sustainability.
• Consistency Across Leadership Changes: A formal policy ensures that fund management remains consistent even as staff and board members change, providing stability across leadership transitions.
• Transparency and Accountability: A written policy can be shared with stakeholders, including board members, donors, and auditors, fostering trust in the organization’s financial decision-making processes.

Conclusion

By establishing a thoughtful fund movement policy, nonprofits can build a framework that ensures financial stability, aligns with investment goals, and supports long-term sustainability. While some organizations may have specialized funds like capital reserves or designated funds, the core principle of managing immediate, short-term, and long-term assets provides the foundation for smart financial management. Regular reviews and updates will ensure that the policy remains relevant and supports the organization’s evolving needs.