In business, as in personal finance, savings are essential to financial health. An asset cushion acts as a buffer against both unexpected expense growth (e.g., damage to physical assets, spikes in population need, etc.) and unexpected revenue loss (e.g., economic recession, shifts in foundation funding, etc.) Yet, some social sector organizations—particularly ones with little to no non-essential spending—may need to sacrifice some of their impact today for financial stability tomorrow. How can an organization achieve the right balance between spending on mission and saving for the future?
While a general rule of thumb is to have between three and four months of operating reserves saved to ensure financial security, this guideline does not apply to all social sector organizations. For institutions such as universities, foundations or churches, assets—often in the form of an endowment—serve as both a cushion and a source of revenue from investment returns. Though they may have large reserves, these organizations often need to be prudent when drawing on reserves because doing so impacts them twice over: it will reduce both their defense against expenses increases and their investment income. Furthermore, these organizations have sometimes been around for a century and plan to continue their work for centuries more. In these cases, determining the trade-off between mission today and financial stability tomorrow can become a complex exploration.
For example, I am currently working with an organization to consider how decisions made today will impact its financial health 100 years from now. Although the unknowns that could impact the organization’s finances in the next century are plentiful, thinking this far out is a useful exercise to focus the organization’s priorities. If a core part of an organization’s mission is to flourish for the next century—and there is a great value in that—then some programmatic expansion in the present may necessarily be curtailed in order to save for the future.
Some organizations we work with worry that having large reserves will elicit questions from donors and stakeholders about whether that money could be better spent on fulfilling the mission today. An exercise like the 100-year model described above can help allay these concerns in two ways. First, it provides an organization’s leadership with an opportunity to weigh, and ultimately take a stand on, what the ideal balance between current and future impact should be for their organization. Secondly, a model itself can make it easier to articulate how small changes in the size and growth rate of expenses in the short-term can have a compounding impact on the future of the organization.
Just as each individual benefits from achieving her own informed, unique financial equilibrium, organizations with the long-term in mind can reap rewards by exploring the balance between spending on mission today and saving for financial stability tomorrow.