By Jill Robisch, Director of Nonprofit Services, First Merchants Bank

A nonprofit can be financially healthy on paper and still find itself facing a cash crisis.

A government reimbursement arrives six weeks late. A major pledge is delayed. A foundation changes the timing of a grant payment. Meanwhile, payroll, rent, program expenses, and debt payments continue as scheduled.

For nonprofit leaders and boards, this is why liquidity deserves the same level of attention as fundraising, investments, and annual budgeting. The goal is not simply to accumulate cash. It is to ensure the organization can meet its obligations, protect its long-term assets, and continue delivering on its mission, even when revenue does not arrive as planned.

Nonprofit Cash Flow Is Different

Unlike many businesses with relatively predictable monthly receipts, nonprofit revenue often arrives unevenly and on someone else's schedule.

Government contracts may reimburse expenses only after they have been incurred. Foundation grants may arrive in one or two large installments. Annual campaigns can generate a significant portion of revenue during the final weeks of the year. Multi-year pledges may be dependable, but the timing of individual payments can still shift.

Reimbursement-based funding creates a particular challenge. The organization must first pay employees, vendors, and program expenses and then wait to be reimbursed. In practical terms, the nonprofit is financing the program while waiting for the funder to pay.

That means growth can actually increase liquidity pressure. Winning a large new contract may be excellent news for the mission and the income statement, and also increase the organization's need for working capital.

The Right Reserve Is Not Simply "Three to Six Months"

Nonprofits are frequently advised to maintain three to six months of operating expenses in reserve. This is a useful benchmark, but it should not substitute for analysis.

Consider two organizations.

One has thousands of individual donors, predictable giving patterns, limited fixed expenses, and the ability to adjust spending relatively quickly.

The other derives 60% of its revenue from two government contracts subject to appropriation risk while carrying a largely fixed cost structure and long-term facility obligations.

Those organizations should not necessarily have the same reserve target.

Instead, leadership and the board should consider questions such as:

• How concentrated are our revenue sources?
• What would happen if our largest funder paid 60 or 90 days late?
• What if a significant grant were not renewed?
• How much of our spending could realistically be reduced within 90 days?
• Which obligations must be paid regardless of revenue fluctuations?
• How much cash is truly available for general operations?

That last question is especially important. The cash appearing on a nonprofit's balance sheet may include donor-restricted gifts, board-designated funds, and unrestricted operating cash. Those dollars are not necessarily interchangeable.

Understanding how much cash is truly available is the first step toward determining an appropriate reserve.

Think of Liquidity in Tiers

Rather than treating cash as one large balance, nonprofits can benefit from dividing resources into separate pools based on when the money will be needed.

Operating cash supports payroll, vendor payments, and immediate expenses and should remain fully liquid.

Operating reserves provide protection against revenue delays and unexpected financial pressure. These funds may be appropriate for highly liquid, short-duration vehicles where preservation of principal and ready access are priorities.

Strategic and long-term capital serves a different purpose. Because these funds are not expected to cover next month's payroll, they can be managed with a longer investment horizon consistent with the organization's investment policy and risk tolerance.

This tiered approach can solve another common problem: keeping too much money idle.

Cash held for years in a low- or non-interest-bearing operating account carries an opportunity cost. For a nonprofit, those lost earnings represent resources that otherwise could support programs, staffing, reserves, or future investment in the mission.

Good liquidity management therefore requires balance. An organization needs enough readily available cash to operate confidently, but not necessarily so much that long-term resources remain unnecessarily unproductive.

A Line of Credit Can Be Part of the Safety Net

Reserves do not have to bear the entire burden.

For some nonprofits, a committed line of credit can provide an important secondary source of liquidity, particularly when the organization expects a payment but cannot control exactly when it will arrive.

For example, an organization may know that a government reimbursement is coming but still need to make payroll before the payment clears. Access to a line of credit may allow it to bridge that timing gap rather than liquidating an investment or disrupting longer-term capital.

The key is to establish the credit line before it is needed.

Organizations are generally in the strongest position to secure financing when their balance sheets and operating results are healthy. Waiting until cash is already strained can reduce available options.

Once established, the organization should clearly document who can authorize a draw, under what circumstances it can be used, and how borrowing will be repaid.

Forecast the Problem Before It Becomes a Crisis

One of the most valuable tools in nonprofit financial management is also one of the simplest: a rolling cash flow forecast.

A 12- to 18-month forecast, updated regularly, can incorporate the following:

• Grant and government reimbursement schedules
• Pledge and fundraising cycles
• Payroll
• Debt service
• Seasonal program expenses
• Capital expenditures
• Significant contractual commitments

A forecast cannot prevent a grant from arriving late. It can, however, show leadership months in advance that a cash shortfall may be coming.

And time creates options.

Leadership may be able to adjust expenses, move investment maturities, arrange financing, communicate with a funder, or make other changes well before the organization reaches a critical point.

Match Investments to When the Money Will Be Needed

Once leadership understands the timing of future cash needs, short-term investments can be structured around those dates.

If an organization knows it has a major capital payment due in six months, funds earmarked for that obligation should not be invested in the same way as assets intended to support the organization many years from now.

Treasury securities, certificates of deposit, government money market funds, and other high-quality short-duration investments can be structured so that funds become available when expected obligations come due. For organizations with multiple future cash needs, a maturity ladder can help balance liquidity and potential return.

The principle is straightforward: the investment horizon should match the spending horizon.

Understand the Financial Strength of the Institution Holding Your Cash

Nonprofit leaders and boards should understand not only where organizational cash is held, but also the financial strength and stability of the institution entrusted with those funds.

FDIC insurance is an important safeguard, but it is only one component of sound treasury risk management. Organizations maintaining significant cash balances should understand applicable insurance limits and any uninsured exposure. Just as importantly, they should evaluate the overall financial condition of their banking partner.

That means looking beyond deposit rates and considering factors such as the bank's capital strength, liquidity, asset quality, profitability, credit ratings when available, and overall financial stability. For nonprofits holding substantial operating reserves or other significant deposits, the strength of the institution itself should be part of the organization's treasury and risk-management discussions.

Boards and finance committees should periodically ask: Are we comfortable not only with how our cash is managed, but also with the financial strength of the institution holding it?

The objective is broader than maximizing deposit insurance. It is to ensure the organization's cash is held within a banking relationship that appropriately balances safety, liquidity, accessibility, financial strength, and return.

Protect the Cash You Have

Liquidity management also means protecting organizational funds from fraud.

Nonprofits can be particularly attractive targets for business email compromise, vendor impersonation, payroll diversion, and fraudulent payment requests. Smaller finance teams and cultures built around responsiveness and service can create vulnerabilities that criminals attempt to exploit.

A few fundamental controls can materially reduce that risk:

• Require dual authorization for significant wire transfers and ACH transactions
• Independently verify changes to vendor or employee payment instructions using a known phone number, not new contact information in the change request
• Use positive pay and ACH debit controls where appropriate
• Reconcile accounts frequently
• Train employees to recognize urgent or confidential payment requests as potential warning signs

Treasury controls should not be viewed solely as an accounting function. Protecting organizational assets is part of the board's broader responsibility for financial stewardship.

Liquidity Is Ultimately About Mission

The objective of treasury management is not to accumulate the largest possible reserve or maximize every dollar of investment return, it is to give the organization choices.

When cash is properly segmented—reserves reflect the organization's actual risks, short-term investments align with future obligations, credit is available before it is needed, and payment controls protect organizational assets—leaders gain flexibility.

They are less likely to sell long-term investments at the wrong time, delay an important program because a reimbursement is late, or make consequential financial decisions under pressure.

For nonprofit boards and executives, that flexibility represents more than sound financial management. It helps protect the organization's ability to deliver on its mission, regardless of when the next dollar arrives.

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About First Merchants Nonprofit Solutions
First Merchants Nonprofit Solutions brings together banking, treasury management, lending, and institutional investment expertise to help nonprofits, foundations, and endowments strengthen their financial foundations. Our team works with nonprofit leaders and boards on liquidity, operating reserves, cash management, financing, investment strategy, and financial stewardship.

Learn more at firstmerchants.com/nonprofit-banking

This article is for informational purposes only and does not constitute legal, tax, accounting, or investment advice. Organizations should consult their qualified professional advisors regarding their individual circumstances.