Nonprofit Reserves and Investment Policies: Common Mistakes and How to Avoid Them

Key Takeaways:

Nonprofit reserves often benefit from being separated by purpose and time horizon (operating cash, operating reserves, short-term reserves, and long-term reserves) so each pool can be invested for when the money will be needed.
Cash held in checking beyond near-term needs can lose purchasing power to inflation and miss out on the higher yields often available outside a checking account, and balances above $250,000 at a single bank are generally uninsured, according to the FDIC.
An Investment Policy Statement should be reviewed at least annually and whenever the organization’s financial position, spending needs, or long-term goals change significantly.
Money earmarked for a known expense in the next few years should generally prioritize liquidity and principal preservation over growth.
Reserves not expected to be needed for five or more years may be suited to a diversified portfolio, since keeping them entirely in cash or CDs risks losing purchasing power.

Disclaimer: This article is for informational and educational purposes only and does not constitute investment, legal, or tax advice. Raffa Investment Advisers is a registered investment adviser. Each organization’s financial situation is unique. Please consult with a qualified investment professional before making financial decisions.

For nonprofit organizations and associations, financial reserves provide more than a safety net. They create flexibility, help organizations navigate uncertainty, and provide the resources needed to pursue strategic priorities and advance their mission. According to the National Council of Nonprofits, a nonprofit board has a fiduciary responsibility to protect the organization’s assets, and how reserves are invested is part of that responsibility.

However, having substantial reserves does not automatically mean an organization is financially prepared. How those reserves are structured, invested, and managed can be just as important as how much money the organization has set aside.

In our work with nonprofit boards and finance committees, we often see organizations accumulate cash over time without establishing a clear strategy for how those funds should be used. Others may have an Investment Policy Statement (IPS) in place but rarely revisit it or confirm it reflects their current financial position and long-term objectives. The result can be an organization that holds too much cash, takes unnecessary investment risk, or lacks the flexibility to respond to changing circumstances.

This article covers five common mistakes nonprofits and associations can make when managing their reserves and investment policies, along with steps that can help avoid each one.

Mistake 1: Treating All Nonprofit Reserves as One Pool of Money

One of the most common mistakes we see is an organization treating all of its cash and investments the same way, regardless of when the money may be needed or what it is intended to fund.

An organization might have cash for monthly operating expenses, funds set aside for an unexpected revenue shortfall, and investments intended to support future strategic initiatives. Although all three pools of money belong to the organization, they serve very different purposes, as our article on emergency reserves and strategic reserves explains. Investing them under the same strategy can create unnecessary risk or limit the organization’s ability to earn an appropriate return.

How Should a Nonprofit Segment Its Reserves?

We recommend establishing distinct reserve categories based on purpose and time horizon. For example:

Operating cash: Funds needed for immediate expenses and routine cash flow.
Operating reserves: Funds set aside to cover unexpected shortfalls or disruptions.
Short-term reserves: Funds intended for strategic initiatives, capital expenditures, or other needs over the next one to five years.
Long-term reserves: Funds that are not expected to be needed for five or more years.

Separating reserves by purpose helps confirm that each pool has an investment strategy aligned with its liquidity needs and objectives. A documented reserve policy helps put that structure in writing. Our guide to segmenting nonprofit reserves and writing a reserve policy provides additional insight into what to include in the policy.

Sample Reserve Policy Template

Download our sample reserve policy for a template you can adapt to your organization’s
objectives and financial situation.

Mistake 2: Holding Too Much Cash in Bank Accounts

Nonprofits have to be cautious of holding significantly more cash in bank accounts than day-to-day operations, even though it may be done to understandably prioritize safety and liquidity.

While cash provides stability and immediate access to funds, excess cash can lose purchasing power over time as inflation erodes its value. Organizations may also miss opportunities to earn a reasonable return on funds they do not expect to use for several months or years.

Funds held as operating reserves, rather than in an operating checking account, can often earn a higher yield than checking accounts typically offer. In our experience, organizations without an efficient cash management policy are often leaving money on the table by keeping those reserves in accounts that pay little or no interest.

How Much Cash Should a Nonprofit Keep in the Bank?

How much cash a nonprofit keeps in the bank is generally based on a target for operating cash, set from expected expenses and cash flow. Balances above that target can then be considered for appropriate cash equivalents, Treasury bills, or a short-term fixed-income portfolio. A nonprofit cash management approach documents how much is held, in which accounts, and at which institutions.

The goal is not to invest every available dollar. It is to maintain sufficient liquidity while ensuring that money not needed immediately is working appropriately for the organization. Bank deposit insurance limits and concentration risk should also be considered when evaluating where cash is held. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category, so balances above that amount at a single bank are generally uninsured.

For reserves that have outgrown cash, our guide to deciding when reserves should move into a long-term portfolio covers when and how that shift is typically made.

The goal is not to invest every available dollar. It is to maintain sufficient liquidity while ensuring that money not needed immediately is working appropriately.

Mistake 3: An Outdated or Generic Investment Policy Statement

An outdated or generic Investment Policy Statement can leave a nonprofit investing under guidelines that no longer fit its needs, since the IPS typically sets how the organization’s investments are managed. It documents the organization’s objectives, liquidity requirements, risk tolerance, asset allocation, investment guidelines, and oversight responsibilities.

Despite its importance, we frequently review Investment Policy Statements that have become outdated or no longer reflect the organization’s actual needs. In some cases, the policy was written years ago, borrowed from another organization, or developed without sufficient consideration of the nonprofit’s unique financial circumstances. A policy that does not reflect current objectives can make it difficult for board members and investment advisors to determine whether the portfolio remains appropriate.

How Often Should a Nonprofit Review Its IPS?

We recommend reviewing the IPS at least annually and whenever significant changes occur in the organization’s financial position, spending needs, or long-term goals. Our article on reviewing and maintaining an IPS covers what that review typically includes.

What Should a Nonprofit Investment Policy Statement Include?

In our view, the investment policy statement should clearly define the purpose of each investment pool, establish appropriate liquidity requirements, specify permitted investments and asset allocation guidelines, and explain how performance will be evaluated. A well-designed IPS should be practical enough to guide everyday decisions while providing flexibility to respond to changing circumstances within established parameters.

Sample Investment Policy Statement Template

Download our sample Investment Policy Statement for a template you can adapt to your organization’s objectives and financial situation.

Taking Too Much Investment Risk With Money Needed Soon

Taking too much investment risk with money needed soon leaves less time for a portfolio to recover from a market decline before the funds must be spent. We sometimes see organizations with a substantial investment portfolio assume that its overall financial position gives it the flexibility to accept more investment risk. However, the timing of future expenses matters just as much as the size of the portfolio.

Consider a nonprofit that is planning to renovate its headquarters in two years. If the funds earmarked for the project are invested heavily in stocks, a market downturn shortly before the project begins could force the organization to sell investments at a loss or reconsider its plans. Even if the portfolio eventually recovers, the timing of the decline could create a significant problem.

The timing of future expenses matters just as much as the size of the portfolio.

How Should a Nonprofit Invest Money It Will Need Soon?

A nonprofit can invest money it will need soon by matching investment risk to the timing and certainty of expected withdrawals. Funds earmarked for known expenses should generally be invested more conservatively, with liquidity and principal preservation taking priority over growth.

High-quality short-term fixed-income investments and Treasury securities may be appropriate for certain near-term needs, depending on the timing of cash flows and the organization’s risk tolerance. For planned expenditures, a maturity schedule aligned with expected spending can help reduce the risk of being forced to sell investments during unfavorable market conditions.

Mistake 5: Being Too Conservative with Long-Term Reserves

While some nonprofits take too much risk with near-term funds, we also see organizations make the opposite mistake by being too conservative with long-term reserves. This may include keeping all reserves in cash, certificates of deposit, or short-term investments.

This approach may feel comfortable because account balances fluctuate less. However, it can create a different risk: failing to preserve purchasing power over the long term. If reserves are unlikely to be needed for many years, an overly conservative investment strategy may limit the organization’s ability to grow its resources and support future programs.

How Should a Nonprofit Invest Long-Term Reserves?

Long-term reserves are generally invested under their own strategy. We recommend evaluating long-term reserves separately from operating cash and short-term obligations. Depending on the organization’s time horizon, financial objectives, and ability to withstand market volatility, a diversified portfolio of stocks and bonds may be appropriate for long-term funds.

The objective is not to maximize returns or take unnecessary risks. It is to establish an investment strategy that balances growth, stability, and liquidity in a way that supports the organization’s long-term mission.

Bringing It All Together: A Better Approach to Nonprofit Reserve Management

In our experience, these five mistakes often share a common cause: reserve management and investment management are treated as separate exercises rather than parts of a coordinated financial strategy.

When we work with a board, a strong framework begins with understanding the organization’s cash flow and financial obligations. From there, the board can segment assets by purpose and time horizon, establish appropriate investment strategies for each pool, and ensure the Investment Policy Statement reflects the organization’s current needs.

This process does not need to be overly complicated. It does, however, require thoughtful planning, consistent oversight, and a shared understanding of what the organization’s reserves are intended to accomplish.

What Are the Goals of Nonprofit Reserve Management?

We believe effective nonprofit reserve management balances three important objectives:

Security: Maintaining sufficient liquidity to protect ongoing operations and navigate unexpected challenges.
Flexibility: Preserving the ability to respond to changing circumstances and pursue strategic opportunities.
Sustainability: Investing longer-term funds appropriately to help preserve and grow purchasing power over time.

There is no single investment allocation that is right for every nonprofit. The appropriate approach depends on the organization’s revenue sources, spending requirements, financial position, risk tolerance, and long-term goals.

There is no single investment allocation that is right for every nonprofit.

The board’s responsibility is to establish the objectives and oversight framework. A well-designed reserve strategy and Investment Policy Statement translate those decisions into a disciplined approach that can guide the organization through changing market conditions and leadership transitions. Our article on what investment management looks like for a nonprofit explains how responsibilities are divided among the board, committee, advisor, and custodian.

A Reserve Strategy Question Every Nonprofit Board Should Ask

If your organization needed to fund an unexpected expense tomorrow, sustain operations through a difficult year, or pursue a major strategic initiative three years from now, would you know exactly which funds were available and how they should be invested?

If the answer is unclear, we encourage you to revisit your reserve strategy and Investment Policy Statement. A thoughtful approach to reserves can provide more than financial protection. It can give nonprofit leaders greater clarity about their resources, more confidence in their decisions, and the flexibility to focus on what matters most: advancing their mission.

How Raffa Can Help

At Raffa Investment Advisers, we serve as a fiduciary investment advisor for nonprofits and associations, including in an OCIO capacity. As an OCIO, we manage the investment portfolio within the guidelines of your organization’s Investment Policy Statement, covering asset allocation, rebalancing, and cash and liquidity management, while your board retains oversight. The relationship extends to reserve strategy guidance, assistance developing and reviewing the IPS, and quarterly reporting that measures the portfolio against the policy. Our advisors are also available to walk new committee members through the IPS, current reporting, and prior decisions.

Schedule a meeting with our team of advisors experienced in partnering with nonprofits and associations.

About the Author

Joe Guest, CIMA®

Senior Portfolio Manager

Joe Guest is a Senior Portfolio Manager at Raffa Investment Advisers. Through his role, he serves as lead adviser to nonprofit organizations, associations, retirement plans, and private wealth clients, working with boards and finance committees to develop investment policies, construct portfolios, and provide ongoing education and guidance. As an active member of the association community, Joe has spoken at Association Forum events and contributed to Forum magazine on investment-related topics impacting associations and nonprofits.

View Joe's Bio

Disclosures:

Portions of this article were drafted with the assistance of AI tools and reviewed by Raffa Investment Advisers staff for accuracy and compliance.

Raffa Investment Advisers is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.

All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Diversification does not protect against loss in declining markets. Money market funds are not insured or protected by the FDIC, and it is possible to lose money by investing in them.

Any forward-looking statements are based on current expectations and are subject to uncertainties.

References to deposit insurance rules are general and educational. Organizations should consult their banks about how a specific rule applies to them.

This article is for informational purposes only and should not be construed as personalized investment advice.