This article was written by Sean Hale of Sean Hale Consulting.
The sudden collapse of Silicon Valley Bank serves as a reminder to all nonprofits: bad things can happen when you keep all your eggs in one basket.
In the course of 24 hours last week, that bank went from looking fairly healthy to becoming essentially worthless as it became unable to give its depositors back their money.
This was bad and could have been worse
Many depositors couldn’t get their money out of their accounts on Thursday or Friday of last week. Thanks to government intervention over the weekend, it looks like depositors can again access at least some of their funds as of Monday.
FDIC Insurance covers bank deposits of up to $250,000. That means that if a bank collapses, the federal government will step in and make the depositor whole again. At least up to $250,000.
But what happens if a depositor had more than that at the bank? Typically they could lose some or all of those funds, and at a minimum they may experience serious delays in being able to recover those funds.
In this particular instance, the government took the unusual step of actually covering the full deposit. This, however, leaves FDIC funds significantly depleted (making the next bailout difficult and a full bailout less likely).
This undoubtedly made for a difficult weekend for all SVB depositors, especially those organizations that needed to process payroll last week (or any other time-sensitive transactions).
This could happen to your nonprofit
It remains too early to know whether the SVP collapse was just a freak accident or the beginning of a more widespread problem in our economy.
Regardless, let this serve as a wakeup call to all of our nonprofits, especially those that have all their eggs in one basket.
Ask yourself:
What would happen if you suddenly couldn’t access your main bank?
What if that happened the day you have to process payroll?
Do you have more than $250,000 in any one bank?
Do you have enough funds in a different bank that you could cover at least month’s expenses if your main bank suddenly collapsed?
Count yourself lucky if your answer to the above questions is, “No problem! We have that covered!”
If you have a different answer, then you should do some follow up.
What can you do?
That depends on your role and how authority and responsibility get distributed at your organization.
Your next steps might look like:
Engaging your CFO or Fractional CFO to assess your particular situation
Asking your current bank(s) whether they participate in CDARS or an Insured Cash Sweep (these can protect assets above $250,000 in a single bank)
Distributing cash more evenly across current banks
Requesting that the board authorize the opening of a new bank account or two so you can diversify risk
Developing internal policies to guide your accounting staff and protect your organization going forward
Move deliberately and without rushing
Having all your eggs in one basket represents a risky proposition for any nonprofit at any time, not just today.
But if you rush to “just do something” rather than moving calmly and deliberately, you run the risk of breaking a few eggs that way as well. Rushing only makes sense if you believe the economy or the general bank situation appears poised to get worse.
You will serve your organization, staff, and mission well by making steady steps to get your eggs in diverse baskets and otherwise mitigate risks.
Pro Tip: You don’t need a dozen baskets
Be careful about the number of baskets you put your eggs into. Each one requires care and maintenance, and that means time and money.
On a similar note, we sometime see nonprofits create a new bank account for each restricted fund or grant it receives. Not only is this not necessary (unless the grantor specifically requires it), managing your money this way can quickly become cumbersome. Good bookkeeping and a good chart of accounts will allow you to appropriately track and report on restricted funds with much more ease.