As businesses in industries across the board continue to adapt to the unique challenges presented by COVID-19, many not-for-profit organizations had to think outside the box to drive their missions as usual. Fortunately, there are ways to take advantage of your organization’s investment reserves to generate cash that can be used for continued initiatives during this period of social distancing and remote lifestyles. In this article, we explore the steps that organizations should take before making decisions about their investments and offer our advice on best practices when deciding to follow through.
Review your investment policy
If your organization makes investments of any kind, your management team should have developed an organizational investment policy, perhaps with the assistance of an investment advisor. This document outlines how cash or surplus assets are invested in the stock market or within various activities of the organization. It also explains the organization’s investment strategies and goals, whether than means being conservative or aggressive, or reaching a certain percentage return. Similar to how an individual strategizes for their personal 401(k) plan, the organization documents their goals in their investment policy.
In addition, the investment policy should have specific guidelines for when funds can be drawn down and at what point rebalancing should occur. Dramatic changes in the stock market often allow for rebalancing of the organization’s equity and fixed investments, and the policy should detail when this is permitted. Take a look at this section of your investment policy to find out; chances are, you will be able to make changes due to the decrease in the economy in response to COVID-19. If you are looking to liquidate some of these funds, then your policy should say who can make this decision on behalf of the organization. For example, it might be the executive director, an executive committee or the board of directors.
This being said, before making the decision to liquidate any funds, we strongly recommend reviewing your budget to see if there are any other ways you might be able to generate additional funding sources or revenue. Dipping into these funds should be reserved for emergency situations only.
What should I look for in my budget?
When you look at your budget, assess your projected revenue for the year. Is this number still realistic for your organization at this point? If not, review the information from a month-to-month perspective. Which month(s) do you anticipate a deficit, and why? Depending on what payments you need to make, it might be worth having a conversation with your suppliers to see if you can push payments to a month where you anticipate generating a surplus. If the deficit is a result of payroll, you may start raising difficult staffing conversations including salary reductions and employee furloughs or reductions in force.
To evaluate your budget, we recommend determining which of the following scenarios best represents your organization right now:
- Best: Your current situation matches what you had originally budgeted for in terms of revenue, in which case you are able to continue operating as usual.
- Likely: Your current situation is somewhere in between the best and worst possible situations. Maybe you can still generate some sources of revenue the same way you were before COVID-19, and they are bringing in enough revenue to make up for those sources of revenue that you’ve had to put on pause.
- Substitute: If you were planning for live meetings or events as sources of revenue, would it be possible to convert them a virtual platform? Some organizations have found that virtual events can perform just as well, if not better, than their live events. Maybe a small investment is needed to make the switch, but the ROI could be bigger than if you didn’t take the leap at all. For not-for-profits and associations who host performances, consider moving these to Facebook, Instagram or Twitter Live. For charities, you might think about moving your fundraising model to online crowdsourcing. No matter what your organization’s mission is, now is the time to step up your online presence, and it will likely pay off when social distancing and remote work start to taper off.
- Worst: You have determined that, after looking at all your sources of revenue and considering alternatives, most or all your sources of revenue are not able to continue as usual at this time. In this case, figure out the degree to which these discontinued sources are affecting total revenue. If it is significant, you may then need to liquidate some of your investments.
How can I take advantage of my investments?
The first thing an organization needs to do before they liquidate their investments is review the investment policy to see what is possible. What does it say each investment can be used for in the event of liquidation? If the investments are restricted, they can only be liquidated for whatever purpose they were intended when they were originally invested. It’s also important to look into what percentage of equities and bonds your policy says you can take out. Is it 70 percent equities and 30 percent bonds, or 60 percent equities and 40 percent bonds? As long as your organization is in compliance with your investment policy, you will be in the clear.
It might also be worth it for your organization to look into taking out a line of credit against its investment portfolio. Be advised that most policies have a limit on how much can be borrowed against unrestricted investments; often it is anywhere between 50 and 75 percent. This being said, if the market goes down, you unfortunately might have to repay a portion of that loan.
Right now, it is more important than ever for organizations to think strategically before acting on anything. As we’ve reiterated in this article, reviewing your investment policy and budget should be on your to-do list during this time. Work with your suppliers on pushing back payments if possible and figure out if you have sources of credit you can use. Consider taking out loans against your unrestricted investments, and if all the previous strategies don’t work, then you might think about liquidating some of your investments.
If your organization needs additional guidance through this process, reach out to Sikich’s investment advisors today. Our COVID-19 Resource Center also provides more in-depth resources to help guide your organization successfully through this crisis.
ABOUT THE AUTHORS
ANDY POWELL, cpa
Andy is a partner at Sikich with over 30 years of experience in accounting and audit services. He has extensive experience providing CFO, assurance and management consulting services to a wide variety of not-for-profit organizations, including associations and public charities as well as government contractors. In addition, Andy has extensive experience with indirect cost rate determination, the DCAA audit process and compliance under the FAR.
Rally Kamenova
Rally is a Managing Director on the firm's Accounting Services team. She has nearly 20 years of experience serving a variety of industries, such as not-for-profit, small businesses and government contractors. She specializes in providing any and all internal accounting department functions to an array of not-for-profit clients.
