This week we pick up our Nonprofit Chart of Accounts Grand Tour talking about cash.

Cash is the lifeblood of a nonprofit organization. It’s also the first account on the balance sheet since it’s the most liquid asset. Nonprofit cash has attributes that are very different from the cash of for-profit companies. In this post we highlight those differences and give you a framework for managing your nonprofit organization’s cash.

Common Cash Accounts

Usually nonprofits maintain more than one account for cash and cash equivalents. Cash equivalents include money market accounts and investments that will turn into cash within three months. Cash accounts we commonly see in nonprofit organizations include:

• Operating checking account
• Other checking accounts
• Separate bank account required by a grant funder
• Payroll bank account
• Savings account
• Money market account
• PayPal (Yes, PayPal should be treated like a bank account!)
• Certificates of deposit with a maturity of three months or less

Each physical cash account should be represented by a separate “bank” type account in your QuickBooks chart of accounts.

Restricted vs. Unrestricted Cash

Cash may be restricted or unrestricted. If you receive a gift restricted for a particular purpose, such as a grant to support a children’s summer program, then those funds may ONLY be used for that expressed purpose. When you accept the grant, you are accepting it with the donor’s strings attached. Frequently restricted grants require reporting to the grantor on how the funds were spent.

We do not recommend establishing a separate physical bank account for restricted cash. You should be able to account for restricted cash in your QuickBooks or other accounting software. In the future when we share some posts on contributions we’ll have more on how to do this.

Unrestricted cash is cash that is not restricted by a donor or grantor. You can use unrestricted cash in any way necessary to help the organization advance its mission.

Unrestricted cash is necessary to operate since restricted gifts and grants frequently do not cover all the expenses of the program or activity for which they are restricted. Also it’s hard to find restricted gifts to cover management and general expenses. Common sources of unrestricted cash include:

• Unrestricted gifts from individuals
• Program service fees
• Fundraiser events
• Merchandise sales

Unrestricted vs. Designated Cash

The board of directors can designate cash to be set aside or used for a particular purpose. For example, they could designate funds to be set aside as a rainy day reserve fund. Designated cash is still unrestricted cash. The board can choose to change the designated purpose or to undesignate the cash.

Nonprofit Cash Pools

Cash in your nonprofit can be seen as belonging to one of three pools.

1. Working Capital

Working capital is the cash you need for normal daily operations of the organization. The money in your operating bank account normally makes up all or most of your working capital.

Money flows in to the working capital pool based on your revenue model. For example, you receive tuition fees at the start of each semester. Or you rely on donations, which are weighted toward the end of the year when most charitable giving occurs.

Often revenue is received in part via PayPal. From there the funds are transferred to the operating checking account where they can be used. The cash balance held at PayPal is also part of your working capital.

Money flows out of working capital as you spend it to pay vendors and employees, place a deposit on a banquet room for next year’s event, purchase program supplies, and pay for all the other normal ongoing expenses of an organization.

You may have a reimbursement type grant where you first incur expenditures, then apply for reimbursement. This type of funding arrangement takes a lot of working capital since it often takes several months to be reimbursed. You must be able to afford to pay for several months of expenses before you see the first dollar of grant income!

2. Reserves

The second pool of cash is called reserves. Reserves are savings built up for future needs. You can and should accumulate cash reserves for a variety of purposes, including:

• As a rainy day fund to tide you through an economic downturn or unexpected expense or loss of a major funding source
• To pay for inevitable future repairs and replacement, such as a new delivery van or roof
• To fund growth, such as a new staff position
• To pay for desired improvements, such as a new computer system

3. Long-term investment

If you raise enough funds to provide adequate working capital and to build up needed reserves, then your board may wish to designate excess cash to serve as an endowment. An endowment is a pool of money invested for the long term where you only spend the earnings. Board designated endowments are called “quasi endowments” or “funds functioning as endowment.” The funds are unrestricted since they were not restricted for endowment by a donor. The board can always choose to undesignated the funds.

Cash given by a donor to serve as an endowment is called a true endowment. In this case the donor has restricted the gift to be used as an endowment.

Endowment funds, whether board designated or true endowment, are normally invested in long term investments with a professional investment manager. The organization draws investment income from the endowment based on the organization’s spending policy, for example, 5% of the investment pool each year. Endowment funds provide long term stability for an organization since they provide an ongoing annual base level of annual income.

Wrap up

Cash and investments for a long-term purpose such as endowment or reserves are normally kept in separate physical accounts from cash intended to be used as working capital.

Cash used for working capital is normally kept in one or more physical accounts, mainly your operating checking account.

Restricted and unrestricted cash can be found both in working capital and in long-term investments. Reserves are usually made up of unrestricted funds set aside for some purpose. Restricted and unrestricted cash for working capital can be kept in the same physical bank account (assuming no donor requirements for a separate account) if you have the proper accounting procedures in place.

One organization we worked with assigned spending purposes to each stream of cash flow, whether the cash was truly restricted for that purpose or not. This lead to a lot of complicated accounting and stress to keep the moneys separate. Think of your cash in terms of the three pools above, and then within those pools track cash as restricted, unrestricted, or board designated. Now you have a better framework for managing cash.

Thoughts or questions on managing cash? Please leave your comments below!