Every arts and culture organization has distinct savings needs, so there is no rule of thumb that widely applies. For example:
- Groups with relatively predictable and stable cash flows require less in savings than those that make large expenditures well before offsetting revenue comes in.
- Organizations with significant infrastructure to maintain need more cash than those with minimal fixed costs.
- Nonprofits with experimental or controversial programming may need a bigger cushion to fall back on than those that create or show popular work.
An organization with only a few days or weeks of cash-on-hand is vulnerable, regardless of its unique situation.
When setting savings goals, first assess your organization’s current situation. One useful indicator of short-term savings is “months of working capital,” a measure of how long an organization can operate with only their unrestricted net assets held in cash or other short-term assets. This metric reveals true liquidity, or the money available for general and immediate use. Another metric, “months of cash plus investments,” provides a complete picture of total savings for the short and long term.
Determine the level of savings that is right for your organization: First, evaluate short-term operating needs. How much liquidity does your organization need to manage predictable swings in cash flow, and to handle everyday risk? A 12-month rolling cash flow projection can be a useful tool for estimating your organization’s short-term liquidity needs. At a minimum, maintain enough cash to cover the months when cash outflows exceed cash receipts, plus a contingency.
Then, evaluate whether your organization would benefit from longer-term savings in the form of one or more cash reserves and/or an endowment.
Resource:
Nonprofits Assistance Fund's Cash Flow Template
