by John Zietlow
“O
h, if we had only known
how deep this recession
would be, how long its
after-affects could linger, and
how pronounced its effects on
givers might be, we would have
held more in cash reserves.”
Doubtless you have heard someone at
a church or charity utter words like
these, and maybe they’ve even twirled
around in your mind.
What if you were the executive
director or board chair for the Boston
Salvation Army and watched your
United Way allocation drop from $1
million in 1990 to $171 thousand in
2011?1 And what happened to the cashversus-debt balance at the almost 200
churches who have defaulted on debt
over the past two years?2
No question about it: in today’s
economy it is as if “cash is king.” Just
as a rapidly expanding economy
masked inefficiency and overspending
in some ministries—according to the
spouse of a mission agency CEO—the
downturn has placed a premium on
proper cash management and on
carefully-devised financial policies.
Storehouse. Al Jandl and Van
Crouch introduced me to the
Storehouse Principle.3 They suggest
God specially blessed storehouses
established by His people. They contend this principle applies equally to
organizations and individuals. “The
LORD will command the blessing on
you in your storehouses and in all to
which you set your hand, and He will
bless you in the land which the LORD
your God is giving you (Deuteronomy
28:8 [NKJV]).” For those short of
funds, start small but start now to
build reserves (a storehouse) and ask
God to bless and grow that storehouse.
Oil. Setting aside adequate oil for
unforeseen future needs appears in
two prominent places in Scripture.
Proverbs 21:204 (NET) says “There
is desirable treasure and olive oil in
the dwelling of the wise, but a foolish
person devours all he has.” The
tough part of this verse to swallow is that last phrase—it is
very hard for a well-intentioned
executive director or board
member to admit that maxing
out on service provision (and in
so doing “eating up the seed corn”) is,
well…still foolish.5 We can see the
validity of buying car insurance for an
event that we hope and trust will
never happen, yet at the same time
walk in ignorance regarding self-insuring against liquidity risk.
The parable of the wise virgins
(Matthew 25:1-13, NET) speaks of foolish wedding guests who “…did not
take extra6 olive oil with them. But the
wise ones took flasks of olive oil with
In today’s economy
it is as if ‘cash is king.’
their lamps. When the bridegroom was
delayed a long time… the foolish ones
said to the wise, ‘Give us some of your
oil, because our lamps are going out.’
‘No,’ they replied. ‘There won’t be
enough for you and for us…” The wedding guests were caught off guard without adequate resources held in preparation. But there’s more: They ran out
of reserves because they did not think
they needed as large a level of reserves
to carry them through the waiting
period. In our organizations’ financial
context, this would be tantamount to
holding too little in cash reserves
because we underestimate the period
over which these reserves must bridge
revenue shortfalls or expense spikes.
Hoarding. Perhaps your organization resists holding an adequate level in
cash because of a valid concern regarding hoarding resources (see James
5:3b, which has more general application than the immediate context).
We’re not talking about trying to get to
the place where our organization does
not require faith to accomplish its mis-
sion. That said, regardless of how
much or how little is held in cash
reserves, we will always be exercising
faith regarding the mission outreach
and the fruit that God promises to it.
Evidence from business. Faithbased organizations don’t mimic business, but studying business behavior
helps us see why we might want to
hold more cash than we previously
thought prudent. A prominent academic study (Bates, Kahle, and Stulz,
[BKS]) documents a tremendous
increase in cash holdings by businesses from 1980 through 2006--a
trend continuing to the present day.7
BKS investigated the reasons for the
increase. They found that companies
are investing less in cash substitutes
such as accounts receivable and inventories (which would convert over time
into cash) and so holding more cash.
Second, and to our point of
recession-induced need, the variability of cash inflows and outflows has
increased dramatically. In finance
terminology, this represents an
increase in risk, and cash holdings act
as a hedge against that risk. You
might hear yourself saying, “Things
don’t seem to be as dependable as
they used to be.” Nonprofits are seeing their service outreach multiply
while revenues are not keeping pace.
Cash enables them to bridge that gap.
Third, organizations build cash
when capital expenditures are low and
reduce cash when making large capital
expenditures. A follow-up study by
three researchers finds that in the
“Great Recession” those organizations
having the smallest levels of cash
reserves going into the recession cut
back the most on their capital investments—no surprise there.8 We expect
ministries to “prefund” major capital
expenditures so we should applaud
build-up of cash on the balance sheet
in anticipation of those expenditures.
Finally, businesses with higher
research and development expenditures hold more cash (presumably to
be able to fund these as well as to fund
operations if there is a small or delayed
payback to these expenditures). For
ministries, the second factor—
increased fluctuations in operating
cash flow (study your Statement of
Cash Flows over the past five years)—
is the key element shared in common
with businesses. Higher risk implies we
should be holding higher levels of cash
reserves.
Benchmarking cash reserves. We
are fortunate to have some comparative
data to guide us in setting our target
reserves level. The Urban Institute (UI)
defines “operating reserves” as “cash
and other liquid assets that can be
tapped when income falls short of
expenses.” Furthermore, to be included
in reserves, amounts your organization
holds in cash and other current assets
have to be unrestricted, meaning that
the cash or other assets have no prohibition on being sold, no purpose limitation, or were the result of revenues and
support in excess of expenses.
The UI calculates operating reserve
ratios using a formula devised by
experts serving on the Nonprofit
Operating Reserves Initiative Workgroup.9 The part of net assets that
comes from “nonborrowed” real estate
and other fixed assets is excluded in
that the organization cannot readily
convert it to cash to pay expenses. The
UI has tabulated data on many nonprofits in the Washington D.C. area and
found that:
• 57% of the organizations have less
than three months’ worth of operating
expenses covered by operating reserves.
Nonprofits are seeing their
service outreach multiply
while revenues are not
keeping pace.
• 19% of the organizations actually
had negative operating reserves, most
commonly because of high levels of
unpaid bills (accounts payable); large
amounts reported under “mortgages
and other notes payable”; or money
owed to benefactors and officers of
the organization.10
Anecdotal evidence suggests
churches and other ministries are in a
better position with respect to operating expenses but for many organizations this position has deteriorated
over the 2008-2011 period. More data
is needed.
Digging out. There are several
routes toward rebuilding oil and storehouse provisions:
• Designate a person to oversee
liquidity. This would normally be the
treasurer.11 Have this individual start
with assessing the needed cash
reserve position and then educating
the board and development team on
this position and how critical it is to
build to and then maintain the position. The designated person then provides ongoing reports including present and anticipated cash positions
along with recommended actions
should the positions be below target.
• Forecast cash changes and your
resulting cash position. Think of cash
planning and cash reserves as a fort or
place of hiding (“A shrewd person sees
danger and hides himself, but the naive
keep right on going and suffer for it”12
Proverbs 22:3 NET).
Think of cash planning
and cash reserves as a fort
or place of hiding.
• Preserve cash by astute management of cash inflows (accelerate
these), cash positions (consolidate
these so your cash is not spread out all
over the place) and cash outflows
(reduce these to the extent possible).
Some donors will prepay pledges if
they know this is important to your
church or nonprofit.
• When completing asset sales,
place the proceeds in cash reserves.
With the recent multiyear downturn in
donations, this sort of strategy may be
a lifesaver, sparing deep personnel
cutbacks or field operation closures.
Conclusion. Financial health is a
prerequisite for mission achievement.
As you and your organization begin to
build or rebuild your oil supply and
stock or restock your storehouse, take
confidence that God is your Source
and He will supply all of your needs
according to His riches in Christ.
John Zietlow, D.B.A., CTP, is Professor
of Finance at Malone University
(Canton, OH) and Associate Faculty at
Indiana University-Purdue University
at Indianapolis (IUPUI). He co-authored
Financial Management for Nonprofit
Organizations (Wiley, 2007) and Cash &
Investment Management for Nonprofit
Organizations (Wiley, 2007). Email: [email protected]. Website: www.johnzietlow.com.
1
Megan Woolhouse, “Salvation Army Cuts Ties
with United Way,” The Boston Globe, August 28,
2010.
2
Shelly Banjo, “Churches Find End Is Near,”
The Wall Street Journal, January 25, 2011.
3
Al Jandl and Van Crouch, The Storehouse
Principle: A Revolutionary God Idea for
Creating Extraordinary Financial Stability
(Broken Arrow, OK: CrossStaff Publishers
LLC), 2004.
4
Scripture and/or notes quoted by permission.
Quotations designated (NET) are from the NET
Bible® copyright ©1996-2006 by Biblical
Studies Press, L.L.C.
5
Nonprofit scholar Liz Keating calls this the
“current services trap.” See Kate Barr’s insightful comments on why this is a dysfunctional
mindset at http://www.nonprofitsassistancefund.org/blog/2007/11/08/how-to-get-out-of-thecurrent-services-trap/.
6
The NET translation has this note for verse 3:
“The word ‘extra’ is not in the Greek text but is
implied. The point is that the five foolish virgins
had only the oil in their lamps, but took along no
extra supply from which to replenish them. This
is clear from v. 8, where the lamps of the foolish
virgins are going out because they are running
out of oil.” Scripture and/or notes quoted by permission.
7
Thomas W. Bates, Kathleen M. Kahle, and
Rene M. Stulz, “Why Do U.S. Firms Hold So
Much More Cash than They Used To?” The
Journal of Finance, 44 (October), 2009, pp.
1985-2021.
8
Ran Duchin, Oguzhan Ozbas, and Berk A.
Sensoy, “Costly External Finance, Corporate
Investment, and the Subprime Mortgage Credit
Crisis,” Journal of Financial Economics, 97
(September 2010), pp. 418-435.
9
The formula is based on the 2006 IRS Form 990.
See related information at http://nccs.urban.org/.
10
Amy Blackwood and Thomas H. Pollak,
“Washington-Area
Nonprofit
Operating
Reserves.”
11
Marie Hollein, “The Treasurer as Chief
Liquidity Officer,” Journal of Corporate
Treasury Management 4(1), 2010, pp. 28-34.
12
The note to this verse in the NET Bible is
instructive: “The shrewd person knows where
the dangers and pitfalls are in life and so can
avoid them; the naive person is unwary,
untrained, and gullible, unable to survive the
dangers of the world and blundering into
them.” Scripture and/or notes quoted by permission.
Reprinted from
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