Nonprofits With Stronger Boards Hold More Cash, but Donors Punish Excess Reserves

Cash reserves are a cushion. They let a nonprofit absorb a bad fundraising year or respond when demand for its services spikes. But cash that sits unused can also raise questions. Are managers holding it for the mission, or for their own comfort? A study by two McCoy College of Business accounting faculty looks at both sides of that question. It appears in the Journal of Accounting, Auditing & Finance.

The authors are Mina Pizzini, Chair and Professor in the Department of Accounting, and Mikhail Sterin, Associate Professor in the Department of Accounting.

Why cash in nonprofits is different

For-profit companies have been studied at length on how much cash they hold and why. Nonprofits have received far less attention, even though the stakes are distinct. A charity’s cash comes largely from donors who expect it to fund programs. There are no shareholders to press management, and no stock price to reflect waste.

That leaves governance as the main check. The board is supposed to limit managers’ ability to use funds for private benefit. The study asks two questions. Is stronger governance linked to how much cash a nonprofit builds up? And do donors react to cash levels that look too high?

What the researchers found

The study uses three measures of board strength. They are the number of board members, the share of independent members, and how actively the board monitors management. All three are positively associated with cash reserves. Nonprofits with stronger boards hold more cash, not less.

That result cuts against a simple story in which cash hoarding signals weak oversight. One reading is that stronger boards are better at building financial cushions, or that they are trusted to hold reserves responsibly.

The second finding concerns donors. The study identifies nonprofits whose cash holdings exceed what their circumstances would warrant. After controlling for governance, those excess holdings are negatively associated with donations in the following period.

In plain terms, donors give less to charities that appear to be sitting on money. The authors interpret this as donors preferring that their gifts be put to work now rather than saved for later.

What it means for boards and executives

Two messages follow. First, a healthy reserve is consistent with strong governance, so boards should not treat cash as inherently suspect. Second, there is a ceiling. Reserves that go well beyond what the organization’s size and risk justify carry a cost in future giving.

Boards can respond by setting an explicit reserve policy, tying it to operating needs, and explaining it in annual reports and donor communications. A stated target turns a large balance from a red flag into a plan.

What it means for donors and watchdogs

Donors and rating agencies already scrutinize overhead ratios. Cash reserves deserve similar attention, but with context. A reserve equal to several months of expenses is prudent. A reserve far larger than peers hold, with no stated purpose, is worth a question.

The study also adds to the evidence on what drives giving. Donors appear to respond not only to a charity’s mission and efficiency, but to whether their money will be spent.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• Good governance and cash go together. Boards that are larger, more independent, and more active in monitoring are associated with larger reserves.
• Excess cash costs donations. After accounting for governance, nonprofits holding more cash than they need received less in future contributions.
• Boards should set and explain a reserve target. Donors seem to read a large cash pile as a sign their gift will sit idle rather than fund services.

Pizzini, M., & Sterin, M. (2025). The relation between cash reserves, governance, and donations in nonprofit organizations. Journal of Accounting, Auditing & Finance, 40(1), 139-164. 10.1177/0148558X221142953