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What does “cash” really mean?
Most organizations set aside money to meet operating requirements or capital needs, as well as for emergencies (rainy day funds). While nonprofits often lump their liquid assets together under the label of “cash,” they actually cover a variety of needs:
- Funds used to pay wages, benefits, and regular operating expenses.
- A source of liquidity for planned routine and/or strategic spending over a defined period.
- Money to cover debt-related expenses such as interest and principal payments.
- A source of liquidity for emergency operating needs.
When allocating money to meet these different needs, you’ll want to avoid the pitfall of double-counting your cash holdings. A single pool shouldn’t be earmarked to pay operating expenses and serve as a rainy day fund. It’s important to state your objectives for each pool and the risks you are willing to assume.
Among the topics discussed in Cash Management for Nonprofits, we stress the importance of establishing an investment policy for liquidity reserves. In addition to stating the objective for each asset pool, an effective investment policy will cover how and when to replenish cash balances. Remember that cash pools are distinct from long-term investment pools: They have different conceptions of risk and time frames. And they are generally intended for reallocation and replenishment versus rebalancing. Download our guide for additional strategies to help you plan and manage your liquidity reserves.
- All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.