Protect your nonprofit from inflation
By: Sean Hale
Tags: Accounting, Inflation, Budget, Finance, Nonprofit

Inflation has gotten worse: Don’t let it wipe out your cash surplus

$100 bills on fire.

Back in August I raised the alarm about rising inflation and how it could impact nonprofits. Since then, the inflation rate has continued its steady climb and good organizations have seen their purchasing power go up in smoke.

Inflation, AKA rising prices for goods and services, can give you an advantage when it comes to paying a mortgage or long-term contracts with locked in rates. Why? Because the shrinking value of the dollar makes it easier to earn it while your expense stays steady.

However, this same phenomenon means that any cash your nonprofit has managed to save over the years will purchase less every month that goes by. If you have cash at the bank in savings, checking, a money market, or CDs, you’ve probably already lost significant purchasing power since the beginning of the year.

Your nonprofit has already lost money

The US economy has seen 6.8% inflation in the past twelve months (Dec 2020 — Nov 2021). You have to go back to 1982 to find a comparable rate!

If your nonprofit had a $100,000 surplus in a checking or savings account the past twelve months, that means you lost $6,800 in purchasing power. I bet you can think of a few purchases that would have been better than just seeing the money evaporate.

Inflation is real

Nobody has a crystal ball, but the trends that have driven inflation this year may very well continue into 2022 and beyond. The pandemic remains a significant factor creating unpredictability for business and personal lives, thus driving inflation. Specifics include:

Supply chain problems worldwide have driven up the price of vehicles, electronics, and more. Stores find it difficult to stock popular items. Manufacturers that depend on parts from abroad find it harder and more expensive to get supplies; delays and sourcing alternatives drive up their costs.

Difficulty in hiring throughout the economy means that businesses must pay much more than before the pandemic to attract and retain talent. When employers raise wages they often must charge more for their goods and services.

A looming childcare crisis could make this worse before it gets better. The pandemic has already driven many childcare providers out of business. The lack of good childcare keeps many people, who are otherwise willing and able to work, from getting a job. This situation adds more uncertainty and inflation to the economy.

How do I confirm if we even have a surplus?

Do you have unrestricted money in your nonprofit’s checking or savings account that you’re not using for day-to-day operations? If yes, that might be a surplus. For example, if over the past three years the account hasn’t dipped below $125,000, then you probably have at least a $125,000 surplus.

How do I protect our surplus against inflation?

A traditional checking account, savings account, CD, or money market account won’t help you. Its hard to find any that pay even 1% interest, much less keep up with inflation.

Each nonprofit has different goals and different risk tolerance. Talk to a reputable investment advisor to figure out what’s right for your organization.

If your organization has a very low risk tolerance, be sure to ask them about options like:

Treasury Inflation-Protected Securities (TIPS)

Government bonds

Commodities

Real Estate Investment Trusts (REITs)

However you protect your surplus, put care and thought into your ability to convert the investment back into cash quickly. Some investments can take just a few days to convert into cash while others take longer.

Don’t wait

Every month that you wait, you lose purchasing power. That $100,000 surplus right now would lose the price of a nice new laptop computer every month (about $566).

Pro tip: if your cash surplus includes donor-restricted funds, make sure you handle those within the provisions the grant agreement. If the grant agreement is unclear or prohibits investments, you can talk to your grantor to request some leeway.

Whatever you do, don’t let more time go by with your surplus steadily losing value. Talk to your investment advisor about getting your surplus invested ASAP in something low-risk so you can at least slow your losses.

Afterwards, you and your board can take the time to create an investment policy to guide your long-term investments and decision-making. These kinds of bigger decisions frequently do take months. You’ll find it easier to give the policy the thoughtfulness it deserves if your nonprofit’s money doesn’t lose significant value every day.