MHM's J. Scott Denlinger's presentation from the Finance, Human Resources, Business Operations Conference - June 4-5, 2015. During this presentation, Scott covered: *Determining appropriate level of reserves *Building and maintaining operating reserves *Budgeting for increases in reserves *How to create a cash flow budget

1. Budgeting and
Building Cash
Reserves
J. Scott Denlinger, CPA
Director, CBIZ MHM, LLC
Shareholder, Mayer Hoffman McCann P.C.

2. Overview
• Determining appropriate level of reserves
• Building and maintaining operating reserves
• Budgeting for increases in reserves
• How to create a cash flow budget
• DON’T HESITATE TO ASK QUESTIONS!

3. The Usual Questions
• How much should we have set aside in reserves?
• How far down should we spend it when times are
bad?
• Subject of a lot of discussion
• The answer…

4. IT DEPENDS

5. Each Organization Is Unique

6. Operating Reserve Percentage
• Tells you how much of your organization’s
operating budget is set aside in reserve
• Need to calculate the following:
– Operating reserve
– Operating expenses
• Calculations among organizations may vary

7. Operating Reserve Percentage
How do you calculate operating reserves?
• Unrestricted Net Assets – Net Property & Equipment =
Operating Reserve
• Deduct other assets?
– Prepaid expenses
– Inventory
– Deposits
– Others?

8. Operating Reserves
How do you calculate operating expenses?
• Total Expenses – Noncash Expenses =
Operating Expenses
– Depreciation
– Amortization
– Bad debt allowance?
– Deferred benefit plans?

9. Example

10. Sample Calculation

11. What is an appropriate level?
• Minimum of 25%, or 3 months, of operating
expenses
• Urban Institute examined the operating
reserves of more than 2,500 nonprofits in
the Greater Washington area
• 57% had operating reserves of less than
three months of operating expenses; 28% of
those had no reserves at all.

12. Factors to Consider
• Type of organization
• Types and diversity of revenue streams
• Peaks and valleys in expenses
• How susceptible the organization is to
economic downturns
• Large outlays of cash projected in future?

13. Factors to Consider
Type of Organization (type of revenue stream)
• How predictable is it?
– Grant driven (recurring or non-recurring?)
– Membership dues
– Special events
• Less predictable – higher reserve

14. Factors to Consider
Diversity of Revenue Streams
• How dependent are you upon one or a few
donors?
• How reliable are those donors?
• Less diversity – higher reserve

15. Factors to Consider
Peaks and Valleys in Expenses
• Seasonal employees?
• Quarterly or annual publications?
• Annual conference or fundraiser?
• Less predictable – higher reserve

16. Factors to Consider
Susceptibility to economic downturns
• Dependent upon contributions
– Individual, Corporate, Foundation
• Dependent upon membership dues
– How strong is the industry (small
business, oil, medical, etc.)
• More susceptible – higher reserve

17. Factors to Consider
Large Outlays of Cash Projected
• Upgrading computers or database
• Implementation of new program or service
• Moving to larger facility
• Trade show or conference
• Expanding membership base

18. Additional Considerations
• What types of reserves
– Emergency
– Expansion
– Equipment
• Determine time frame for building up
reserves

19. Additional Considerations
• To borrow or not to borrow:
– Lines of credit
• How will the organization pay it back?
• Specific purpose (trade show, etc.) vs.
• Operating expenses

20. Additional Considerations
• To borrow or not to borrow:
– Term loans
• How will the organization pay it back?
• Consider building an intermediate
reserve

21. What’s Appropriate for Your Organization?
Your Board should be involved in these
discussions:
• Determine how your organization will define
“operating reserves”
– Include Prepaid Expenses, Deposits, etc?
• Determine what level your organization
wants to maintain

22. What’s Appropriate for Your Organization?
Your Board should be involved in these
discussions:
• Establish a minimum level that must be kept
intact and how it will be replenished if used
• Develop a policy as to how the reserves will
be invested
– Safety – no big risk

23. What’s Appropriate for Your Organization?
Your Board should be involved in these
discussions:
• Establish how often the reserves will be
evaluated (monthly? quarterly?)
– Financial statements
– Investment statements

24. Potential Obstacles
• Donors
• Staff
• Board
• Desire to fulfill mission
Importance of communication!
Effective communication can help navigate obstacles.

25. Communication with Donors
• Doesn’t energize donors
• Reserves can be viewed as waste or abuse
• Communicate need for long-term reserves
• Stress protection of mission by mitigating
risk

26. Communication with Staff
• May not understand finances
• May be viewed as robbing programs
• Communicate need for long-term reserves
• Engage certain staff in budget process
• Include conversation about risk
management as a best practice

27. Communication with Board
• Same issues as both donors and staff
• Importance of monthly/quarterly review of
financial statements
• Communicate need for long-term reserves
• Stress fiscal responsibility - risk
management as a best practice

28. Can you ever be over-reserved?
Public Charities
• Perception by outsiders (donors, watchdog
groups, media, etc.):
– Hoarding cash
– Not fulfilling mission
– Additional funding not needed

29. Can you ever be over-reserved?
Trade Association
• Perception by members:
– Hoarding cash
– Not doing enough to support industry
– Dues are too high

30. Can you ever be over-reserved?
• More than two years of expenses
• Understand the purpose of the reserves
• Be prepared to communicate

31. Building Reserves
• Making it part of the budgeting process
• How much per year?
• Similar to thought process for individuals
• Need for cash-flow budget

32. Building Reserves
• Prepared on GAAP basis – not cash basis
• Includes and excludes items which affect
cash flow:
– Property & equipment purchases
– Depreciation
– Multi-year grants
• Need for cash-flow budget

33. Cash-Flow Budgeting
• Particularly important in economic
downturns
• Shows seasonal fluctuations
• Allows evaluation and planning for capital
needs
• Aids assessment of long-term borrowing
needs

34. Creating a Cash-Flow Budget
• Operating budget as starting point
– Typically Accrual-Basis
• Convert operating budget to cash-basis
– Determine level of detail
– Review budget line items
– Determine line items to be converted
– Examples
• Depreciation/amortization
• Loan repayments
• Fixed asset purchases

35. Example

36. Example

37. Example

38. Questions

39. Questions after the session?
J. Scott Denlinger, CPA
Director and Practice Lead
Outsourced Financial Services
Nonprofit Services
Scott has more than 20 years
experience in accounting, tax,
consulting and auditing.
(301) 951-3636 Ext. 6739
sdenlinger@cbiz.com
Contact:
Scott has dedicated much of his career to serving the
nonprofit sector. He is the Engagement Shareholder on
many of the firm’s larger audits of business and
advocacy associations and charitable organizations. On
the consulting side, Scott designs and implements
outsourced CFO and accounting engagements and
assists clients in the preparation of internal financial
statements, presentation to their Boards and
preparation for year-end audits. Known for his ability to
translate difficult accounting concepts into layman’s
terms and for his penchant for teaching, Scott is
frequently asked to lead seminars and workshops on a
broad range of financial management and reporting
topics. In addition to his numerous speaking
engagements on best practices and financial
management, Scott’s involvement in the nonprofit
community includes published articles and service on
the Board of an organization that helps abused and
neglected children.