Wednesday, May 9, 2012

How Much Surplus Do You Need?

What could possibly be bad about a nonprofit having a large surplus of cash? According to Lesley Rosenthal, author of "Good Counsel," there's a perfectly good reason why it's not necessarily a good thing to have too much money in reserve.

Rosenthal wrote that, while it's always a good thing to have some money saved up, nonprofits need to make sure there isn't too much. This is because a large surplus could indicate that the organization is not doing as much good as it could or should.

This raises another question: How much surplus is appropriate? Rosenthal explained that this question can be answered by weighing financial and legal matters. She suggested four things to consider with your counsel:
  • Insurance deductibles: Some organizations may carry insurance policies with sizable deductibles, where the policy does not cover attorneys’ fees or losses until they reach a certain size. Counsel should help the finance team understand whether coverages include or exclude defense costs, and whether these costs are necessary.
  • Self-insurance: Some large nonprofits may self-insure for medical, casualty, and workers’ compensation claims. Organizations with self-insured exposure must establish liability funds to cover known claims as well as incurred but not reported claims and the costs of the defense.
  • Pending threatened litigation: Counsel should be sure to update the finance staff on the status of these potential litigation matters, especially those for which insurance coverage or defense may not be available, and help calculate the material potential financial impact on the organization against which reserves should be held.
  • Compliance with matching fund requirements: Counsel should coordinate with finance and fundraising staff about the terms of governmental or foundation grants that require matching funding. Together they should establish appropriate levels of reserves to make sure that matching obligations are met.

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