(First published in the March 2011 issue of Nonprofit Business Advisor, available to subscribers in print and online editions on February 22, 2011)

During the continuing economic crisis, it’s more important than ever for nonprofit organizations to develop smart strategies for the money they already have at hand, in order to provide them with the greatest financial benefits.

Mark Van Benschoten, CPA and principal at Rea and Associates, said if investment planning is currently on your radar, now is the time to “Go ahead and do it.”

Whether a nonprofit has an excess $100,000, $1 million, or $5 million that it does not need for operating expenses, the first thing it must do is ask itself, “What are we comfortable doing with it?” the CPA said.

According to Van Benschoten, organizations should start by determining their investment horizons and decide if they are seeking short-, mid- or long-term investments.

“Ask yourself, ‘Out of $5 million—or whatever bucket of money you have—how much of it are you comfortable living without for one year?’ Five million dollars might not be realistic, so I suggest to organizations that they think about splitting it up,” he said. For example:

• Short-term investments—These types of investments may range from 12 to 18 months and may include cash, CDs, treasuries or other investments that are relatively easy to liquefy. Consider how much money may be needed readily at hand to fund, for example, an advocacy campaign, construct a new building, or launch a new program, he said.
• Mid-term investments—These sorts of investments may range from 24 to 36 months and may include longer-term CDs or treasuries, which can relatively preserve capital, but also offer a longer-term horizon for maturity.
• Long-term investments—These types of investments may range from 42 to 60 months and may include mutual funds, stocks, real estate, metals and others, depending on an organization’s risk tolerance.

Once you’ve “sliced and diced,” your horizons, the next step involves deciding your risk tolerance and how to preserve your capital, Van Benschoten said. For instance, in the short-term, you want relatively low-risk investments that will preserve your capital, where mid-term investments may take on a little more risk, and long-term investments will allow your capital to grow, accelerate and appreciate.

Still, knowing how much money you want to spend and determining the types of investments you want to make won’t make much difference if your organization does not have the proper policies and procedures in place.

“Having an investment policy in place will act as a guide,” Van Benschoten said. “It’s a strategic road map for your bucket of money. If someone says, ‘We should invest that five million dollars,’ well, investing means different things to different people. I may be an aggressive investor with a high risk tolerance and someone else might be conservative. And the road map will also help determine what types of things you can invest in. [For example], maybe you only want to work with green investments,” he said.

Consider these points, Van Benschoten said, when you write your investment policy:

• When to complete a review of the policy. Things can change over the course of several years, the CPA said, “So ask yourself, ‘Is this what we still believe in?’ and, ‘Due to market changes and the economy, should we adjust?’” Remember to change the policy as necessary. Van Benschoten said he knew one organization that had a policy stating that its investments should be divided 50-50, in mutual funds and CDs. But due to the poor economy, when they moved their funds into CDs exclusively, they needed to review and make changes to their policy.
• Authority. There are two distinct levels of authority, the CPA said. First, decide who can make transfers, sell or purchase investments, contact the broker, etc. Sometimes it’s an investment advisor or broker that has authority to make decisions about the investments and sometimes it’s a staff person who is given internal responsibility. Whatever is decided, spell it out in the policy, he said. For instance, a CFO may be able to make certain transactions, but only up to a certain dollar amount.

A second, more important level of authority, Van Benschoten said, involves who can withdraw money. Do not permit withdrawals by verbal request (such as over the phone) and obtain full board approval in writing before allowing funds to be withdrawn.

• Keep track of broker interaction. The CPA said he once had a client with a detailed investment policy that a broker agreed to use. The situation worked well for a year, he said, but in years two, three, four and five, the broker began to day-trade, even though it was specifically spelled out in the investment policy that this was forbidden. “No one looked because they were happy with the money generated,” Van Benschoten said. Stay in contact with your investment advisor to identify potential opportunities, as well. “Hopefully, the broker is telling you what he sees, what to consider, and can give you time to plan and make decisions,” he said.
• Use benchmarks. Benchmarks gauge how you are doing, and Van Benschoten recommends caution. “You can find a benchmark to fit your scenario any day of the week and it changes frequently, so define your market,” said the CPA. For instance, if the S&P 500 is at 10 percent, decide if the organization wants to exceed it.

If your organization is ready to start investing, or it wants to take another look at the policies and investments it has already developed, Van Benschoten suggests that you:

• Perform research. Start with a search on the Internet. There are numerous boilerplate policies that can act as a starting point, the CPA said. Consider items included when developing your own policy.
• Talk to other nonprofits in the same area and ask what they do.
• Talk to the organization’s CPA and/or attorney and gather their input.

The CPA said it can be frustrating to watch a nonprofit organization underutilize the money it has.

“They may have $5 million … but they still need to take a critical look and deploy it. I tell them, ‘You’re smarter than this. You built the reserve; now let’s look at what’s the best way for the organization to use it.’”

For more information

Rea and Associates, Inc., accountants and business consultants, is an Ohio public accounting firm with more than 200 dedicated professionals who provide clients with a complete range of accounting services and professional business counsel. Rea has an extensive history that goes back 70-plus years. To learn more, go to www.reacpa.com/. To contact Mark Van Benschoten, e-mail Mark.VanBenschoten@reacpa.com.

The full article, including top investment blunders, is available in the March 2011 issue in print and online to subscribers.