Financial Health in Organizations: Solvency and Reserves

Posted by Matthew Thomas

Back in June, we talked a bit about solvency. One of the best ways to maintain solvency is to have a healthy amount of reserves, and to use them judiciously.

matthew-thomas-2Clients often ask me what I consider to be a healthy amount of reserves for their organization. My typical answer is that it really varies based upon their particular enterprise’s goals and needs. Many enterprises operate without much in the way of reserves at all, and this ends up constricting and restricting their options when finances get tight. Nevertheless, long-term solvency is often dependent on having healthy levels of reserves.

In order to set a healthy reserve target, consider answering the following questions:

  1. How much money do we need to make up the difference between our lows in income and our highs in expenses?  (Basic cash flow cushion)
  2. What sorts of emergencies could put us out of business if we don’t have the funds to cover them right away?
  3. Do we foresee any major new initiatives from which we may want to draw down savings in order to start them?
  4. If we lost our major source of revenue, how long would it take to wind down our affairs and go out of business? How much would this cost?
  5. Are we dependent on any cash for investment revenue?
  6. What assets can we sell to raise cash if needed?

Adding up the amounts these six questions generate can help begin to generate a reserve target.

Do you have any additions or subtractions to this list? What has worked for you?

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Topics: Matthew Thomas, Financial Health,, Solvency,, Reserves

Financial Health in Organizations: Solvency

Posted by Matthew Thomas

Solvency is a significant measure of an organization’s financial health. No matter what the type of business, solvency factors in to an organization’s capacity to carry out its mission and purpose. Solvency is an issue for non-profits and churches as well as businesses and corporations.

matthew-thomas-2Solvency is determined by two basic tests:

  1. Balance sheet: a solvent balance sheet has assets that exceed liabilities.
  2. Cash Flow (Liquidity): cash flow is solvent when obligations can be met in the normal course of business.

Organizations that cannot meet one or both of those tests are considered insolvent. Insolvent enterprises often face added legal responsibilities to creditors (not just shareholders or members) in many jurisdictions.

Many organizations operate in or around this “Zone of Insolvency”, adding financial stress to the development of mission and purpose. In the business world, insolvency cuts into profits, since credit is more expensive and opportunities for growth take second place to managing financial emergencies. In the non-profit and church world, insolvency causes paycheck-to-paycheck living that distresses mission, staff, and donors, and additionally tends to create deferred-maintenance policies for fixed assets such as real estate and significant equipment.

There are a variety of approaches to dealing with solvency, which we will cover in future posts:

  • Healthy Levels of Reserves
  • Debt Management
  • Balance of Liquid vs. Non-Liquid Assets
  • Revenue/Expense Balance
  • Mindsets and Paradigms

We would be glad to assist you in assessing your financial health – particularly around the issue of solvency. Click the button below for more information.

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Topics: Matthew Thomas, organizational decision making, Debt, Financial Health,, Solvency,