Aligning Your Portfolio With Your Nonprofit’s Liquidity Needs

In the complex financial life of a nonprofit, liquidity isn’t merely a convenience; it’s a necessity. A well-designed cash strategy ensures that your organization can meet grants, obligations, and strategic opportunities without compromising long-term mission investments. This article explores how to structure and manage liquidity policies that align with your nonprofit’s responsibilities and goals. 

Start with a liquidity policy and operating reserves 

Begin by determining how much cash you should hold. Define reserve targets in terms of months of expenses — for example, three to six months — and days of cash on hand, such as 60 to 90 days. Incorporate both metrics to provide dual guardrails. 

Next, distinguish between restricted and unrestricted funds in your liquidity policy, ensuring that only the unrestricted pool supports operating needs. Establish a governance cadence — for example, quarterly review by finance and investment committees — to help ensure your policy stays current as needs evolve. 

Cash flow forecasting and segmentation 

Projecting 12 to 24 months of cash flow can reveal timing risks, especially around grant disbursements, seasonality, and staff payroll cycles. Tie your forecast to major revenue and expense cycles so you know when cash may ebb and surge. 

Adopt a three-bucket cash segmentation framework: 

1. Operating cash: The most liquid funds needed for near-term use, such as 30 to 90 days. 
2. Core reserves: Intermediate buffer to smooth variability, such as 3 to 12 months.   
3. Strategic reserves: Longer-term or opportunity funding that doesn’t disturb daily operations. 

This segmentation clarifies where cash lives, how long it can stay idle, and how aggressively it should be invested. 

Short-term investment policy and treasury toolkit 

Within your short-term investment policy, specify eligible instruments such as money market funds, T-bill ladders, and high-quality bond ladders. Define credit quality — for example, minimum ratings — as well as diversification limits, maturity bands, and settlement standards. 

Decide between bank sweep vs. custodial accounts. Understand how FDIC insurance, ICS (Insured Cash sweep), and CDARS (Certificate of Deposit Account Registry Service) work to protect deposits across institutions, document rebalancing thresholds, and maximum weights per instrument type. 

Treasury documentation should include: 

• Eligible vehicles 

• Credit or rating minimums 

• Settlement periods 

• Rebalancing rules 

• Maximum concentration 

Integrating endowment and quasi-endowment liquidity 

If your nonprofit holds an endowment or quasi-endowment, incorporate spending policy guardrails, such as 4 to 5 percent draw limits*, and define timing for distributions, such as quarterly or annually. 

When markets decline, manage “underwater” periods by adjusting draws, deferring rebalancing, or pausing new commitments. Rebalance your portfolio in light of draw needs to maintain your liquidity posture without undermining the mission. 

Private markets and commitment pricing 

When investing in private markets, hold capital-call reserves to avoid forced selling of liquid assets. Use pacing models, such as three to five times calls vs. commitments, to time exposures and buffer liquidity stress points. 

Be wary of interval funds and redemption gates — know how and when redemptions are allowed. Assess whether such vehicles fit within your liquidity constraints, and limit exposure accordingly. 

Scenario planning and liquidity stress testing 

Run downside scenarios — recessions, donor pullbacks, and delayed payments. Quantify drawdowns and run liquidity under those stress cases. Build trigger-based actions, such as stopping new commitments when the runway drops below nine months. 

In board reports, include metrics such as runway — how many months you can operate without additional income — the variance between forecast and actual, and coverage ratios, such as reserves. 

Implementation in the IPS 

Embed liquidity metrics directly into your investment policy statement (IPS). Define bands, thresholds, and review cadence. 

Clarify committee roles: who monitors daily cash? Who rebalances? Who reports? Take minutes in every meeting to document decisions and policy deviations. Plan for annual IPS policy reviews to adjust for organizational changes or evolving markets. 

Checklist: Build a liquidity-first portfolio 

Here’s a 10-point checklist to operationalize these principles: 

1. Define months-of-expense and days-cash-on-hand targets. 
2. Separate restricted/unrestricted funds with clear governance 
3. Produce a 12 to 24 month cash-flow forecast tied to seasonality. 
4. Segment cash into operating, core reserve, and strategic buckets. 
5. Specify eligible short-term instruments with ratings, limits, and maturity bands. 
6. Choose between bank sweep vs. custodial platforms and address FDIC/ICS/CDARS. 
7. Set rebalancing rules and thresholds in treasury documentation. 
8. Coordinate endowment/quasi-endowment draws and underwater response. 
9. Reserve capital for private market calls and limit illiquid vehicle exposure. 
10. Stress-test liquidity, define triggers, and integrate metrics into the IPS. 

FAQS 

What is a nonprofit liquidity policy? 

A nonprofit liquidity policy is a formal document that outlines how much cash a nonprofit should hold, how it is invested, and how it is monitored to ensure operational stability. 

How do you set an operating reserve policy for a nonprofit? 

You typically set an operating reserve by targeting sufficient cash for a defined number of months of operating expenses or a days-of-cash threshold, then adjusting for revenue volatility and organizational risk tolerance. 

What is treasury management for nonprofits? 

Treasury management for nonprofits involves overseeing short-term investments, cash flows, banking relationships, and liquidity tools to ensure funds are available when needed without overexposing the organization to risk. 

What should a short-term investment policy for a nonprofit include? 

It should define eligible instruments (money market funds, T-bills, high-quality bonds), credit and concentration limits, settlement terms, rebalancing rules, and oversight responsibilities. 

What is a cash segmentation strategy for a nonprofit? 

Cash segmentation means dividing cash into buckets (operating, core reserve, strategic) based on intended use and time horizon, then investing or holding it accordingly to match liquidity needs. 

Why is liquidity management important for nonprofits? 

Liquidity management ensures nonprofits can meet obligations, respond to funding timing gaps, and support mission-driven initiatives without unnecessarily draining longer-term assets. 

From where to keep funds to how we can help make the capital markets work harder for you, discover all the ways Mercer Advisors supports nonprofits. Contact our endowments and foundations team to learn more.