Risky business: The importance of financial reserves and a diversified fundraising strategy

You have probably heard the phrase “putting all of your eggs in one basket”. To risk all you have on the success or failure of one single factor is just that – a risk. And it is a significant risk for any business, including for-purpose organisations that need to generate revenue to deliver their mission.

Relying on a single source, or only a few sources, of revenue leaves your organisation open to sudden downturns in revenue that can’t be recouped through alternate activities. Events are a fitting example: heavy reliance on in-person events as a sole income stream has seen many organisations suffer financially through the pandemic and natural disasters.

As we get ready to wrap-up another financial year, we are sharing tips and insights, direct from sector partners, for implementing a diversified fundraising strategy (yes – grants should be a part of it).

We know from our experience working with grant-making entities, organisations that can demonstrate sustainability are highly regarded by funders. And it is these organisations that are ultimately setting themselves up for long-term growth and success in achieving their mission.

The importance of financial reserves in running a business for purpose

“Financial reserves are funds that your organisation can set aside to provide a buffer against any unexpected or sudden costs,” says Michael Maher, head of not-for-profit consulting at JANA Investment Advisers, who delivers customised consulting to institutional clients.

“Reserves can be built over time when your organisation achieves excess funds over your operational and community service commitments,” he explains.

“Whilst the concept of achieving and retaining a ‘profit’ may sound counterintuitive for a ‘not-for-profit’ organisation, placing excess funds away with the objective of being used at a later date, to achieve your purpose is considered financially prudent.”

Rainy-day fund

As organisations build financial reserves, Maher says it is important to consider their purpose and how they will be utilised.

“The most common purpose for many organisations is holding reserves as a ‘rainy day’ fund that is called upon to respond to unexpected changes in financial position and the economic environment. These could include events such as unexpected cuts to funding, staffing costs or specific events that call upon the services of your organisation,” he explains.

“From an investment perspective, reserves for this type of purpose should be invested to ensure accessibility (liquid) and capital preservation. These characteristics see many organisations invest their reserves in cash management accounts and term deposits. Other ‘low risk’ asset classes could also be considered; however, it would be encouraged to seek financial advice.”

Playing the long game

Another purpose for reserves is to develop a corpus or “endowment”. For variable reasons, many organisations may find they have sufficient reserves to cover “rainy day” events and are able to place away funds for a longer time horizon (e.g. greater than five years).

“The corpus may be invested in asset classes that carry some risk but are expected to ultimately provide a return greater than that of cash and inflation over longer time periods,” Maher says.

“These would include asset classes such as equities, property, infrastructure, and alternatives. An investment strategy blending these types of assets can be developed for the corpus in the context of achieving your desired long-term return objective and risk tolerance.

“Additionally, a defined and disciplined distribution policy can provide revenue on an annual basis that contributes to delivering services and achieving your purpose. Essentially, a corpus can be constructed to achieve both growth over the long term and provide an annual diversifying revenue stream.”

When in doubt, seek advice

There is a higher level of complexity when investing your reserves in this manner and seeking financial advice is highly encouraged. This is a delicate balancing act and JANA has worked with numerous clients where this has been successfully achieved over long periods of time.

“Developing and maintaining a healthy level of reserves is a sign of financial prudency and sound governance,” Maher explains.

“It adds to the long-term sustainability of your organisation, has the potential to attract funding and instils public trust in your organisation and its ability to deliver its purpose.”

Is there a one-size-fits-all approach?

Of course not all fundraising methodologies are the best fit for some organisations, depending on who your stakeholders are. So make sure that, like any business, you do your market research to examine who your likely supporters are and how they might support you.

To ensure you develop a plan that is equal parts progressive and executable, Tanya Hundloe, director of Social Money Solutions, which delivers fully researched and evidence-based strategic fundraising plans, recommends you start by benchmarking where you are at now with each of your fundraising strategies.

“That means interrogating how you have performed year on year for each activity in terms of income and expenses, together with other relevant metrics that identify whether you have shrunk, stayed the same or grown,” she explains.

“However, alongside data and metrics you should be seeking feedback from organisational staff, board members, volunteers, donors, as well as potential supporters, as if you are considering new funding opportunities. Use a blend of surveys and face-to-face interviews to uncover the truths, understand preferences and test new strategies.

“Once you have collated the intel, choose strategies that best align with your connections, capabilities and offer the best return on investment over reasonable time frames. This may require a mix of internal and outsourced support to achieve if you don’t have enough staff or expertise in a particular area to enable growth.

“Once your fundraising plan is in place, do a budget that provides forecasts and reflects all costs. Good research and planning will set you up for success.”

Final thoughts

Whether you are just starting out or looking to continue and grow your organisation’s work in achievement of mission, ensure that you do your research, speak to trusted and reputable experts and most importantly, always involve your donors through open, honest and transparent communications with how you intend to raise funds and what you are going to do with those funds.

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JANA respectfully acknowledges the Traditional Custodians of the land where we work and live. We pay our respects to Elders past, present and emerging. We celebrate the stories, culture and traditions of Aboriginal and Torres Strait Islander Elders of all communities who also work and live on this land.

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JANA respectfully acknowledges the Traditional Custodians of the land where we work and live. We pay our respects to Elders past, present and emerging. We celebrate the stories, culture and traditions of Aboriginal and Torres Strait Islander Elders of all communities who also work and live on this land.