Certified Nonprofit Professional Practice Exam

Is it true that a nonprofit organization may choose to keep extra cash on hand to maintain adequate cash balances?

1. True

2. False

3. Only during financial crises

4. Only if permitted by grants

The correct answer is: True

A nonprofit organization may choose to keep extra cash on hand to maintain adequate cash balances because having reserves can be critical for financial stability and operational flexibility. Maintaining sufficient cash allows the organization to manage day-to-day expenses, respond to unexpected costs, and ensure it can fulfill its mission without interruption. Reserves can serve as a buffer against fluctuations in funding, especially for nonprofits that may experience variable income streams due to factors like economic changes or seasonal donation patterns. This practice supports long-term planning and sustainability, enabling the organization to effectively allocate resources and pursue strategic opportunities. In contrast, the other options suggest limitations or conditions that do not generally apply across the board. For example, the notion that keeping extra cash is only acceptable during financial crises overlooks the proactive nature of sound financial management. Similarly, implying that reserves are only allowable if permitted by grants disregards the autonomy nonprofits have in financial decision-making unless specific grant agreements specify otherwise. Overall, maintaining adequate cash balances is a best practice that contributes to the overall health and resilience of nonprofit organizations.