In a recent letter to his shareholders, Warren Buffet makes mention of wisdom he learned from his grandfather, Ernest.
Buffet, who was listed again as the third richest individual in the world by Forbes Magazine, shared a copy of a letter* written by his grandfather in 1939 to his uncle’s family, outlining his instruction and encouragement to maintain $1,000 in cash as a reserve for unexpected events. Buffet included the letter to highlight both his personal commitment and the importance of this principle for all organizations, especially those he’s considering as investments.
Buffet says about his grandfather, “Ernest never went to business school—he never in fact finished high school—but he understood the importance of liquidity as a condition for assured survival.”
Think you’re off the hook as a nonprofit? Not so. The importance of cash reserves applies every bit as much to ministry organizations as it does to for-profit businesses.
During my 25 years of working with evangelical non-profits, I have seen far too many that essentially lived paycheck to paycheck. Except it sounds more spiritual when they tell me they are “trusting God” for his provision. While I completely agree that we must trust our sovereign God (and that he is able to do exceedingly more than what we can accomplish with our meager savings), it is also clear that we have a responsibility to be good stewards of his resources. The challenge is finding that balance between God’s sovereignty and our responsibility. It takes both. A reliance on one without the other can prevent us from fully accomplishing what God intends.
So how do we live out this balance in our ministries? Warren Buffet says, “Because of that commitment (to maintain cash reserves), we customarily keep at least $20 billion on hand so we can both withstand unprecedented insurance losses…and quickly seize acquisition or investment opportunities, even during times of financial turmoil.”
I know, I can’t comprehend a number as big as $20 billion either, but his approach shows how important the principle of maintaining adequate reserves is for any organization.
I’m going to go out on a limb here and say that maintaining adequate cash reserves is even more important to a non-profit than a for-profit organization. For-profit businesses have a much easier job of quickly generating cash, either by slashing expenses or increasing sales. Businesses focus on increasing shareholder value and act quickly to accomplish this objective. Non-profits, on the other hand, are typically slower to react and less nimble when needing to cut expenses or increase revenues.
So how do you approach maintaining cash reserves for your ministry? What has worked for you? What have you learned by going through the last four years, which some have called “the great recession”?
If you’d like to learn more about how to build cash reserves, check out the ECCU white paper, Cash Reserves: How Much s Enough? It outlines the three main reasons cash reserves are required and how to set an adequate cash reserves target for your ministry.
* Go to page 22 of this PDF to view the letter.