2018 04-17 How Much Should My Nonprofit Target for Reserves?

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Page© RAFFA WEALTH MANAGEMENT, LLC. All rights reserved.
© RAFFA WEALTH MANAGEMENT, LLC. All rights reserved.
How Much Should My Nonprofit Target for
Reserves?
Mark Murphy, CFA
April 17, 2018

Page© RAFFA WEALTH MANAGEMENT, LLC. All rights reserved. Page© RAFFA WEALTH MANAGEMENT, LLC. All rights reserved.
DISCLAIMER
2
This presentation summarizes the results of an informal, non-scientific study compiled by analyzing
the results of 702 surveys completed by nonprofit finance executives. This presentation is for
information purposes only. Participant responses have not been verified. Data analysis was
performed by Raffa Wealth Management. When stating “nonprofit responses” it should be noted that
all responses are limited to the nonprofits that participated in the survey. No broader implications
should be assumed.
Different types of investments involve varying degrees of risk, and there can be no assurance that the
future performance of any specific investment, investment strategy, or product referenced directly or
indirectly in this report, will be profitable, equal any corresponding indicated historical performance
level(s), or be suitable for your nonprofit’s portfolio. Moreover, you should not assume that any
discussion or information contained in this report serves as the receipt of, or as a substitute for,
personalized investment advice from Raffa Wealth Management, LLC or from any other investment
professional. To the extent that you have any questions regarding the applicability of any specific
issue discussed above to your nonprofit’s unique situation, you are encouraged to consult with Raffa
Wealth Management, LLC or the professional advisor of your choosing.
This information was gathered from reliable sources but we cannot guarantee accuracy. Any
performance related information is based on participant responses and have not been verified. Past
performance is not an indication of future results and any investment can lose value.

LEARNING OBJECTIVES
3
ATTENDEES WILL LEARN TO:
• Better understand what levels of reserves other organizations are maintaining
• Utilize a clear, objective process to determine the right amount of funds held in
reserve for your organization

NASBA ESSENTIALS
4
• Course Update Date: April 13, 2018
• Course Reviewed By: Dennis Gogarty
• Course Review Date: April 13, 2018
• NASBA Field of Study: Non Profit Investment Reserve

AGENDA
5
• Introduction
• What Are Investment Reserves?
• How Much Are Other Nonprofits Holding in Reserves?
• What is the Process for Determining your Target Reserve Level?
• Questions

TARGET RESERVES
6
How much is enough in reserves?
•A percentage of your annual budget?
–Three-to-six months?
–Six-to-twelve months?
It depends!

POLLING QUESTION 1
7
With which broad category does your nonprofit most closely identify?
1. Public Charity
2. Membership Association

POLLING QUESTION 2
8
What is your nonprofit’s annual operating expense budget?
1. Less than $5 million
2. Between $5 and $25 million
3. More than $25 million

AGENDA
9
• Introduction
• Questions

BACKGROUND INFORMATION
INVESTMENT RESERVES
10
HOW ARE RESERVES DEFINED?
• The unrestricted net assets as reported on the Statement of Financial Position.
• The accumulated net surpluses of the organization.
• Liquid cash and investments held in a reserve fund investment account.
WHAT IS THE PURPOSE?
• To ensure that the organization has adequate funds available in the event of an
unanticipated catastrophic event or business situation significantly reduces revenue and
threatens the financial viability of the organization.
• To cover unbudgeted and extraordinary expenditures brought about by unanticipated
challenges and as a source for emergency funding.
• To provide a source of capital for the research and development of new products and
services.
• To enhance the purchasing power of funds held for future expenditure and to maintain
the financial stability of the association.

AGENDA
11
• Introduction
• Questions

STUDY ON NONPROFIT INVESTING
12
FIFTH ANNUAL STUDY ON NONPROFIT INVESTING (SONI)
•In February of last year, over 700 nonprofit finance executives completed a survey about
their organization’s investment policies and results.
•Raffa Wealth Management has analyzed the results of the survey and prepared the
2017 SONI report for review.

BUDGET AND RESERVE BALANCES
13
•What is your nonprofit
organization’s current total
annual operating budget?
•What are your organization's
total cash assets?
– Cash in checking,
– Excess operating cash,
– Short/intermediate term
investments,
– Long term investments
Associations
Public Charities
2017 SONI RESULTS

INVESTMENT RESERVES VS. BUDGET
14
HOW MUCH DO YOU HOLD IN RESERVE VS. BUDGET?
Associations
0
2
4
6
8
10
12
14
16
18
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 More
Less than $5M Budget Size
NumberofResponses
Reserve to Budget Size

15
Associations
PercentageofResponses
20.4%
32.0%
47.6%
<50% 50-100% >100%

16
Associations
0
2
4
6
8
10
12
14
0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 More
$5-$25M Budget Size
NumberofResponses

17
Associations
18.3%
38.0%
43.7%
<50% 50-100% >100%
$5-$25M Budget Size

18
Associations
0
1
2
3
4
5
6
7
8
0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 More
$25M+ Budget Size
NumberofResponses

19
Associations
45.2%
22.6%
32.3%
<50% 50-100% >100%
$25M+ Budget Size

20
Public Charities
NumberofResponses
0
10
20
30
40
50
60
70
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 More

21
Public Charities
24.6%
28.5%
46.9%
<50% 50-100% >100%

22
Public Charities
NumberofResponses
0
5
10
15
20
25
30
35
40
45
50
0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 More
$5-$25M Budget Size

23
Public Charities
49.7%
27.1%
23.2%
<50% 50-100% >100%
$5-$25M Budget Size

24
Public Charities
NumberofResponses
0
2
4
6
8
10
12
14
16
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 More
$25M+ Budget Size

25
Public Charities
57.7%
28.2%
14.1%
<50% 50-100% >100%
$25M+ Budget Size

AGENDA
26
• Introduction
• Questions

RISKS AND OPPORTUNITIES
27
How is your organization structured?
• How diversified are your income
streams?
• How reliable are the income
streams?
• How long will it take to cut costs?
What are your opportunities?
• Are there potential opportunities to
grow member value or further
your reach?

RISK/OPPORTUNITY ASSESSMENT
28
Go through risk/opportunity assessment process to determine:
• What are our risks?
• How likely are they to occur?
• What is the magnitude and the dollar impact of those risks?
• What are the potential new programs, or strategic initiatives that the
organization could take on?

RISK/OPPORTUNITY ASSESSMENT OF
SAMPLE ORGANIZATION
29
Risk 1 for sample organization:
Any significant reduction in demand for
a revenue source.
Example:
Change in legislation has negative
impact on income.
The result:
A reduction in income, but you have
set costs you must pay before making
cut backs.
Things to consider:
How vulnerable are your revenue
streams?

SAMPLE ORGANIZATION
30
Risk 1 for sample organization con’t:
Any significant reduction in demand
for a revenue source.
Things to consider con’t:
What is a bad case scenario for a
change in legislation in your
organization's field? How would it
impact your organization?

SAMPLE ORGANIZATION
31
An economic recession.
Example:
During the financial crisis and years after from 2008-2012, Sample Organization
had a net operating loss of $2.9M.
The result:
Discounting that total value back over the five years by the average annual
expected return for the portfolio results in a loss of $2.5M.
For the base case $1.2M was selected to approximately cover the worst year of
operating losses that was seen in the last recession.
Things to consider:
Look at how your organization performed in the past. How did it perform during
the Financial Crisis in 2008/2009?

Stock Market Decline.
The result:
Assuming a worst case scenario for a
combination of the Long Term and Short
Term Reserve results in the following
decline.
Things to consider:
Based on how your organization is
invested, how would it be impacted by a
large market decline? If you’re only
invested in fixed income, what would be
the impact of a sudden large increase in
interest rates?
SAMPLE ORGANIZATION
32

SAMPLE ORGANIZATION
33
Membership Decline
The result:
A 20% reduction in budgeted membership dues was applied to the current dues
income of $120,000 for the maximum case. The base case applied a 5%
reduction.
Things to consider:
What has been the largest amount of membership decline in the past? What
could you foresee as a bad case in the future?

SAMPLE ORGANIZATION
34
Cost to bring a program in house.
Example:
A one time cost to bring a proprietary service under the organization’s
management.
Things to consider:
Are there any programs that your organization could take over? What are
the costs associated with doing so?

Succession planning.
The result:
If there was a need in the future to search for a new executive director, there
would be some one-time costs.
Things to consider:
While a new executive director may not seem like a current issue, there is
always the possibility that a search could be required.
SAMPLE ORGANIZATION
35

SAMPLE ORGANIZATION
36
Office Expansion/Technology Upgrades
Example:
Sample organization might need to expand its office space over the next 18
months. It would cost roughly $80K and be budgeted for after the initial
expansion.
Things to consider:
Could your organization need new office space soon? When was the last
time your technology was upgraded?

SAMPLE ORGANIZATION
37
Legal issues.
Things to consider:
Could your organization face a lawsuit for any activities it’s involved in? What
are the costs of hiring counsel?
Contingency for an unforeseeable event.
Things to consider:
There is always the potential that other costs could pop up down the line that
currently aren’t considered risks.

SAMPLE ORGANIZATION
38
New program/ revenue stream.
Example:
Sample organization wants to develop a new program or service for members.
An organization wants to start a new advertising campaign to improve brand
recognition.
Things to consider:
What are the costs associated with starting a new program that you are
considering?

Maximum Minimum
Likelihood Magnitude Description of Risk Needed to Fund Needed to Fund
1 Medium High
Legislation results in reduction
in licensing and examinations 3,461,596$ 2,577,610$
2 Medium High
Economic recession - impact on
operations 2,500,000$ 1,200,000$
3 Medium Medium
Market decline - impact on
reserve 1,113,200$ 1,113,200$
4 Low Low Reduction in membership 25,000$ 6,000$
5 Medium High
Costs associated with taking
over management of Program 2,500,000$ 2,500,000$
6 Low Low Succession planning 107,000$ 107,000$
7 Medium Low Additional office space 80,000$ -$
8 Low Medium Legal issues 250,000$ 125,000$
9 Low Medium
Contingency for unforeseeable
event 250,000$ 125,000$
10 Low Medium New program 750,000$ 375,000$
Total Estimated Reserve Target 11,036,796$ 8,128,810$
SAMPLE ORGANIZATION
39
SUMMARY

SAMPLE ORGANIZATION
40
Next steps:
• Draft reserve policy
• How will you get there?
• Review periodically

KEY TAKEAWAYS
41
1. Respondents to the SONI Survey had the following breakdown of
reserves vs budget:
2. How your organization operates drives the level of reserves needed.
3. Identify key risks and opportunities your organization has. How likely
are they to occur? How much of an impact would they have? How
much would they cost? The result of this analysis drives the dollars
needed in reserve.
AssociationsPublic Charities

CONCLUSION
42
What should you do now:
1. Review organization's Risks/Opportunities
2. Participate in SONI
3. Reach out for guidance
RWM is available to engage in Target Reserve or Investment Policy Development
engagements at a fixed hourly fee.
For more information:
• Visit www.npinvesting.org or
• Email info@raffawealth.com
Thank you for attending!

AGENDA
43
• Introduction
• How Much Can Our Organization Invest?
• How Are Much Are Other Nonprofits Investing?
• Questions

2018 04-17 How Much Should My Nonprofit Target for Reserves?

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