Nonprofits play an invaluable role in supporting communities and innovating on new ways to tackle our collective challenges. In a rapidly shifting environment, it's important for nonprofits to have the tools to monitor their financial health in a holistic way. At PNC Institutional Asset Management® (PNC IAM), our Enterprise Financial Modeling solution provides nonprofit leaders with means to enhance decision-making and improve long-term outcomes. Utilizing a patent-pending modeling platform to establish and maintain an investment solution, Enterprise Financial Modeling incorporates strategic objectives, key financial metrics and organization risk tolerance. We find that investment assets can have a considerable impact on measures of organizational health, particularly those related to liquidity and other elements of nonprofit financial safety nets. A strong financial foundation plays a vital role in supporting nonprofits in achieving their missions - and we can help you on your financial journey.
How Enterprise Financial Modeling seeks to enhance decision-making
Enterprise Financial Modeling guides clients through a four-step process that begins with acquiring an intimate understanding of an institution’s goals and leads to implementing and monitoring a customized investment strategy.
1. Organizational Goals & Projections
Our modeling workflow begins with a questionnaire-guided discovery process to understand the role investment assets play in determining enterprise financial health. These investment asset pools include donor-restricted funds and unrestricted endowments, among others. We also explore key metrics that measure financial health, permissible asset classes, and planned spending from investment assets, along with other topics relevant to the optimal investment strategy.
We review the nonprofit’s strategic plans and financial projections to refine our foundational understanding of the organization’s financial health. This forward-looking review, which may include a discussion of planned financial commitments as illustrated in Figure 1, equips us with a financial backdrop with which to prepare a recommendation.
Figure 1: Sample Timeline of Financial Commitments
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2. Enterprise financial analysis
Step two unites investments with financial health. We seek to understand the influence of market volatility and different asset allocation profiles on the organization’s financial outlook. In practice, this means examining how favorable or challenging market environments and different investment risk postures within those environments might affect vital financial metrics, such as days cash on hand, debt service coverage ratio, and unrestricted net asset levels. Figure 2 illustrates the output from our scenario analysis of one of these metrics, days cash on hand, across different potential portfolio profiles. In this example, the magnitude of both upside potential and downside risk expands as the portfolio profile becomes more aggressive. Moreover, we consider the financial health impact of capital spending funded from investments or debt. These insights can equip the nonprofit organization to better comprehend its ability to tolerate investment risk and quantify the financial effect of changing investment strategy.
Figure 2: Days Cash on Hand (5-Year)
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3. Customized investment strategy
With foundational knowledge of the client and a keen understanding of how investment strategy impacts broader financial health, we tailor a recommendation around improving certain financial metric outcomes (Figure 3).
For example, a nonprofit may want to understand the degree to which investments can help provide liquidity for a capital spending project, versus utilizing debt financing. Another organization may look to achieve capital growth to bolster its ratio of spendable cash and investments to debt. No matter the goals, we aim to strike the optimal asset allocation that most efficiently balances return needs with the appropriate risk budget.
Figure 3: Targeted Financial Metric Outcomes
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4. Implementation & oversight
We then implement the customized investment strategy, which entails updating the investment policy statement to reflect clearly defined guidelines and concrete risk parameters. Ongoing monitoring, typically delivered through periodic reporting, is a critical check to help ensure the implemented investment strategy remains appropriate. We track how key financial metrics have changed over time (Figure 4). These measures remain benchmarks for organizational health and are influenced by financial market volatility. Whether a change in goals, operating performance or other material factor occurs, we maintain an ongoing conversation with our clients to ensure the investment strategy stays on track.
Figure 4: Days Cash on Hand
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Ready to Help
By recognizing the intersection of investment reserves and financial health, you can make more informed decisions and improve outcomes. For more information on how PNC has helped organizations like yours, please reach out to your PNC representative. To explore our offerings, visit pnc.com/iam.
Accessible Version of Charts
Figure 1: Sample Timeline of Financial Commitments
Time T | Position for modest growth while hedging downside risk |
T + 2 Years | Major capital project Strengthen reserves without sacrificing long-term capital needs |
T + 4 Years | Pay down debt Growth assets necessary to build capital over long term, with time to recover from volatile markets |
T + 7 Years | IT system investment Reduced ability to take risk in funds earmarked for IT investment |
T + N Years | Additional capital project |
Figure 2: Days Cash on Hand Across Potential Portfolio Profiles (5-Year)
Percentile
| Conservative | Current (50/50) | Moderate (60/40) | Aggressive (70/30) |
0-5 | 152.00 | 145.00 | 128.00 | 118.00 |
5-25 | 177.00 | 185.00 | 178.00 | 178.00 |
25-50 | 197.00 | 210.00 | 213.00 | 223.00 |
50-75 | 222.00 | 240.00 | 253.00 | 278.00 |
75-95 | 247.00 | 275.00 | 303.00 | 338.00 |
Median | 197.00 | 210.00 | 213.00 | 223.00 |
Figure 3: Targeted Financial Metric Outcomes
Asset Class | Current Portfolio | Proposed Portfolio |
Domestic Equity | X% | Y% |
International Equity | X% | Y% |
REITs | X% | Y% |
Infrastructure | X% | Y% |
Core Fixed Income | X% | Y% |
High Yield | X% | Y% |
Bank Loans | X% | Y% |
Emerging Market Bonds | X% | Y% |
Cash | X% | Y% |
Figure 4: Days Cash on Hand
Base | Fall | Rise | |
Beginning of Quarter |
| - | 442.39 |
Unrestricted Cash | 442.39 | - | 2.96 |
Unrestricted Investments | 445.35 | - | 16.11 |
Avg. Daily Operating Expenses | 451.09 | 10.38 | - |
End of Quarter | 451.09 |
