Key points
- Ideal liquidity isn’t about fixed rules of thumb (e.g. 3–6 months of costs), but about how long an organisation can operate before decisions become forced rather than planned.
- Liquidity levels should reflect the organisation’s specific risks, revenue predictability, credible shock scenarios, and what is genuinely liquid and usable.
- A mature board can clearly articulate its target runway, trade‑offs, and trigger points, and confidently explain why that reserve level is appropriate to funders, beneficiaries and itself.
Few questions generate more discomfort in not-for-profit (NFP) boardrooms than this one: how much liquidity is enough? Too little, and the organisation risks fragility in the face of funding delays, shocks, or strategic opportunities. Too much, and stakeholders may question whether scarce resources are being stockpiled rather than deployed for mission.
The challenge is that there is no universally “correct” answer. Rules of thumb – such as holding three or six months of operating expenditure – are easy to communicate, but they can oversimplify a far more nuanced reality. Liquidity is not just about survival; it is about confidence, choice, and governance.
Our view which is supported by the review of financial information across 57 (large) NFPs, is that most organisations don’t have a “cash problem”. They have a cash policy problem: cash levels often exist because of history, timing or legacy decision, rather than a board-approved view of what cash is for.
In considering an ideal liquidity reserve, boards should be considering the following questions:
1. How long can the organisation operate before decisions become forced rather than planned?
Boards commonly review current ratios and cash balances, but those measures on their own don’t answer a critical governance question. Our analysis indicates that median cash runway is 6.8 months. 21% organisations have less than 3 months of cash cover and only 19% have 12 months or more of cash cover.
This variability appears across subsectors and across similar sized organisations, suggesting liquidity positions are often not tied to a consistent risk framework. So there is an opportunity for NFPs to spend more time focusing on liquidity.
2. What risks are the board trying to insure against?
Is the reserve intended to cover timing mismatches in grant funding, a sudden loss of a major contract, or an economic downturn? Or is it there to allow the organisation to continue delivering services while leadership restructures or repositions the business? Different risks imply different liquidity needs.
3. How predictable is the organisation’s cash flows?
An organisation with diversified, recurring revenue may require a very different buffer from one dependent on a small number of cyclical grants or fundraising events. Liquidity should reflect volatility, not just size.
Identify “credible shocks” and scenario plan for 2-4 realistic scenarios. For example funding delay (payments arriving 60-90 days late), wage costs rising faster than contract indexation, contract transition (retender outcomes) and demand spikes (services demand rising without matching funding uplift). How are you going to respond?
4. What is truly liquid and usable?
Headline cash balances can be misleading. How much of the balance sheet is unrestricted, readily accessible, and not already committed (formally or informally) to future programs? An “ideal” reserve that cannot be used when needed is no reserve at all.
Set a runway target and codify it into a reserve policy. Once scenarios and response times are defined, the board can set a policy such as:
- Min. runway: X months
- Target runway: Y months
- Trigger point: if runway falls below X, management implements agreed mitigations and reports to the board
5. What tradeoffs are willing to be made?
Holding liquidity has an opportunity cost. Funds held in reserve are not being spent on services today. Yet insufficient reserves may force reactive decisions tomorrow—cutting programs, deferring payroll, or accepting funding on unfavourable terms. Where does the board draw that line?
6. How does liquidity align with the board’s risk appetite and strategy?
A conservative organisation focused on continuity may prioritise larger buffers. One pursuing growth or innovation may accept leaner reserves, backed by strong forecasting and contingency planning. Either position can be legitimate – if it is explicit and intentional.
Our review of 57 organisations suggests that where boards have not explicitly defined runway targets, cash levels become vulnerable to reactive decision making. Either spending buffers too quickly or holding buffers without a rationale.
Ultimately, an ideal liquidity reserve is less about a formula and more about governance maturity. It reflects an organisation that understands its risks, cash dynamics, and strategic ambitions, and is willing to articulate why its reserve level is appropriate for its mission.
Perhaps the most important question, is “Could the board and management explain and defend this number to themselves, funders and beneficiaries?”
