10 Things To Ask Your Banker Right Now
June 13, 2012 Michele Donohue
The bandit Willie Sutton was famous for saying he robbed banks because that’s where the money was kept. Nonprofits probably don’t need the firepower Sutton was packing. That doesn’t mean getting the cash is going to be as easy.
There are lots of banks with cash. You shouldn’t just walk into any old savings and loan. You need both answers and the truth. Here’s what you should be getting answers about regarding the place where your organization’s money spends the night.
Is the bank secure?
Too big to fail is not always the case. At least 405 banks have failed since January 2009. Gary Groff, vice president of New Resource Bank in San Francisco, Calif., said more nonprofits are asking questions about a bank’s financial security since the economic downturn.
“Nonprofits are asking about FDIC (Federal Depositors Insurance Corporation) insurance and the fiscal responsibility of the bank. And it is the fiduciary responsibility of the board of directors to make sure the nonprofit’s money is protected,” he said. Ensuring that the bank is strong and checking for FDIC insurance isn’t being pushy. It’s doing your due diligence to make sure your funds are protected.
How will you partner with my organization?
A bank shouldn’t just be an institution where you store your money. Your organization deserves a partner. “Nonprofits are looking more and more to their banker to advocate, collaborate, provide community and business leader connections and advice,” said Pamela Keefe, vice president, nonprofit relationship manager at the National Bank of Arizona in Phoenix.
A banker should never be too busy for you. Walk away if you try to make an appointment and believe you aren’t given time and sound advice. There are other banks that don’t want to work for you; they want to work with you.
If you are seeking senior level people for the organization, your banker probably knows someone who would fit. “As bankers, we are out in the community and well-connected. Since we are seeing a lot of movement in the NFP arena for leadership roles, we are asked often if we would know of anyone to fill these positions,” said Keefe. From a chief financial officer to development directors, your banker might be able to lead you to your next best candidate for an open role.
What do you do within the community?
Groff said nonprofits should ask about partnerships with the larger community. He said his bank takes a “three P” approach — thinking about people, the planet and profit. Finding a bank that incorporates your mission values, such as sustainability or community objectives, with secure financial strategies would be a win-win. “I have seen more nonprofits have an awareness of where their money is going. What is that money doing on a day-to-day basis? You need that alignment of values, knowing the money is going to be loaded to mission-aligned companies and nonprofits. That resonates with a lot of folks.”
What can I do so my organization has some sort of financial predictability?
No matter how predictable you think donations and grants can be, there is always room for unpredictability as the past few years have shown. Keefe said it is typically recommended nonprofit clients maintain three years of operating expenses in a portfolio designed for near-term cash needs. “This way, they are in a position to weather any fluctuations in donations or grants that they may receive,” she said.
The three-year mark isn’t a hard and fast rule. You should analyze your organization’s history to see what works best for you. Keefe also recommended a portion of the portfolio be allocated to growth investments – but ensure you are following your organization’s Investment Policy Statement (IPS).
If you don’t have a written IPS, make one now. It can help keep you on track for financial predictability because it takes the emotion out of investing. It can outline the goals of the investment portfolio and help you decide when and how to make changes if the portfolio is falling short.
How can exchange rates impact our work as an organization?
Many nonprofits are looking beyond their own backyards to make the world a better place. With these global missions comes the need to understand how currency will impact the work. Currencies are ever fluctuating based on global markets. Take for example the euro versus the dollar. In the 120 days from Oct. 28, 2011 to Jan. 16, 2012, the euro compared to the dollar swung between a low of $1.27 and a high of $1.47.
It doesn’t matter whether you work in areas that use the euro or the Tanzanian shilling. Currency is a moving target. “It would be important to understand the long-term currency fluctuations relative to the dollar. It would also be prudent to know what the historical range of the currency is against the dollar. We advocate investing in securities denominated in U.S. dollars,” Keefe said.
Groff explained that if your nonprofit is helping buy and install water pumps in several African countries it can hurt if those currency rates change during the time you are working there. “The big nonprofit will hedge. You can buy that money at different times and lock in a rate. Most small nonprofits will not have cash or capital to do that,” he said. “I would say stay short on those things. Don’t do long-term things and don’t lock yourself in. You are not in the game of risk taking. You are trying to control costs.”
Keep in mind that while Third World countries might have the most need for nonprofit assistance, those countries and their currencies are usually extremely volatile. Those currency fluctuations could impact your work and what you can afford to do in those countries. Again, historical data can help you. Look at the median costs of your work and currency trends for the past few years and see if you have the money and assets to make your mission feasible in that currency.
What should I know about lines of credit?
“Lines of credit should be used for temporary timing differences in the borrower’s cash cycle,” said Keefe. “If they receive their payments monthly, as one would in a point of service nonprofit, and they have payroll twice per month, then I would assume that they would need a line approximate to half of their monthly budget.”
According to Groff, “I think you have to think of what you need and match the need with the facility. You want to do analysis on cash flow and working capital needs. Everybody’s needs are different.”
Should our nonprofit look at owning real estate?
Transitioning from renting space to owning would be a large step for any nonprofit. Mortgage rates are at historic lows and there is an influx of properties sitting on the market. You need to talk with your banker and board finance committee to see if buying is the correct step. “Purchasing a property in this market is not a bad idea, but the capital requirements are high in today’s lending environment. We are seeing anywhere from 25 percent to 35 percent in equity for real estate purchases by owner-operators,” said Keefe.
“A lot of the financials of the nonprofits fluctuate with the market as well,” said Groff. “If you are sitting on cash — maybe discuss the options. We haven’t seen a big increase on a case-by-case basis, but it could be a good opportunity.”
In addition to comparing renting versus owning costs, you should look into state and local nonprofit tax exemptions. With many local and state governments stretched thin and facing deficits, elimination of tax exemptions are on the table to increase revenue. For example, this past January Chicago city officials announced the city would eliminate nonprofit fee waivers for water, sewage and other costs.
What are some unique ways I can leverage my organization’s finances?
More nonprofits are trying to leverage donors beyond a simple cash gift, according to Groff. If the group needs a $150,000 line of credit but does not qualify for a loan, a donor might guarantee the loan. “That donor might not have to pay anything. But they are delivering $150,000 of value without giving a dollar to that nonprofit.”
If you have a high net-worth donor, or a group of high net-worth donors, you can leverage that dormant net worth through the guarantees. As long as you don’t default on that loan, the guaranteeing donor doesn’t pay a dime.
What issues do you forecast during the next 12 months?
Your bankers obviously do not have crystal balls or they would have hit the Mega Millions lottery. You should ask for guidance during the next 12 months. Groff said while there are positive signs in the economic outlook, nonprofits should still be conservative with sensitivity projections.
“I think it’s really fragile right now and one really bad thing happens and we can be in another bad place economically,” he said. “There seems to be a light at the end of the tunnel. I think nonprofits, business and individuals are running leaner and meaner. If we can retain that frugality and conservativeness, that will benefit us. If you run yourself at a lower base line, there is not as much risk.”
How do I prepare for a worst-case scenario?
Groff said you should plan for disaster, but hope for the best when it comes to finances. Your organization should not live or die by a grant. “It’s a challenge. Be conservative with your projections and look at sensitivity projections and plan accordingly.”
While this economic downturn was unprecedented, the nonprofits that survived and thrived were the ones that thought about emergency plans. Groff recommended looking at what would happen if your top two donors suddenly stopped giving altogether. “See what your cash flow would look like and if you can pay your bills,” he said. “If you have these kinds of plans in place, surprises will be on the upside instead of the downside.”
Michele Donohue is an award-winning writer and a former reporter for The NonProfit Times.