This week’s sudden closure of Toronto-area Goodwill stores due to a cash flow crisis is a great reminder for nonprofit boards to ensure they have the proper cash policies in their Board Policy Manual. Watching income statements and balance sheets does not necessarily reveal the cash flow problems that can cripple a business.

There are two areas of the Board Policy Manual that can help boards avoid a cash flow crisis. The first is a reserve fund policy. Most boards have a policy in place in which the CEO is instructed to maintain a cash reserve to cover a certain number of months of regular operating expenses. While a range of 3-6 months is common, it is up to each board to analyze its revenues and expenses to determine an appropriate range. This type of cash policy helps the board assess on an ongoing basis whether the organization is achieving its objectives. If the organization has difficulty maintaining the reserve then the board needs to revisit the vision and mission and ensure the strategic plan addresses any underlying issues. A significant advantage of maintaining a healthy reserve is that the board has funds available to seize unprecedented opportunities when they arise.

The second and equality critical policy that is often missed is a dollar figure that automatically triggers a board advisory once cash-on-hand drops below a certain amount. This figure should be set to allow enough time for the board to act before the cash flow crunch becomes a full-blown crisis. Since board members are personally liable for unpaid wages, having the board engage early in the process to avoid a crisis could avoid the en masse resignation of the board such as happened with Goodwill and keep the board in place to help manage the organization through the crisis. The board would have the time to decide whether to sell assets, go into debt, cut programs, engage in fundraising or work with the CEO to put a thoughtful plan in place if closures and layoffs are inevitable.

Having these policies in place will put the board in a better position to monitor cash flow and prepare for potential problems. Cash flow problems don’t necessarily arise gradually such was the case at Goodwill. They can often be sudden and unexpected impacts on either revenues or expenses which is why it is critical to have the proper policies in place before a problem arises. Managing cash flow well builds much better “goodwill” with an organization’s stakeholders.