Understanding Liquidity: What Non-Profits Need to Know

Published on September 9, 2025 by Portia Kohls in Client Accounting & Advisory, Not-for-Profit

Effective liquidity management is essential to the financial health and long-term sustainability of non-profit organizations. In recent years, regulatory changes, particularly FASB’s ASU 2016-14, have placed a renewed emphasis on transparency around how non-profits manage and report liquid resources.

In this post, we’re breaking down what liquidity means in a non-profit context and how your organization can meet evolving disclosure expectations and requirements.

What does “liquidity” mean for non-profits?

Liquidity refers to an organization’s ability to meet its short-term financial obligations using readily available assets, like unrestricted cash, receivables, or investments that can be quickly converted to cash. In other words, liquidity answers the question: Do we have the financial flexibility to fund our operations over the next 12 months?

Under ASU 2016-14, non-profits must now include both:

Quantitative disclosures that list financial assets available within one year of the balance sheet date, and
Qualitative disclosures that describe how the organization manages its liquidity and what strategies it uses to ensure funds are available when needed.

These disclosures are usually included in the notes to the financial statements and are intended to improve transparency, not just for auditors and accountants, but for donors, charitable foundations, and the public.

What makes resources “available” in the liquidity context?

Not all financial assets are available for immediate use. ASU 2016-14 requires organizations to assess the availability of resources, not just their existence on the balance sheet. Some key factors that affect availability include:

Donor restrictions, such as gifts earmarked for specific programs or future periods.
Board designations that reserve funds for specific purposes.
Endowment funds, where only income, not principal, may be used.
Conditional grants that can’t be recognized or spent until specific requirements are met.

These limitations reduce the amount of financial assets truly available for general use within the next 12 months. Clear disclosures help readers understand which funds are accessible and which are not.

Common metrics for measuring liquidity for non-profits

To maintain a healthy financial position, non-profits are encouraged to monitor key liquidity ratios, such as:

Current Ratio (Current Assets ÷ Current Liabilities). This metric measures short-term financial health. A ratio of 1.0 or higher is generally desirable.
Months of Cash on Hand: This metric indicates how many months of expenses could be covered using unrestricted cash. The best practice is 3–6 months.
Available Net Assets: This metric reflects spendable, unrestricted resources available to support operations.

Tracking these metrics allows non-profit leaders to proactively manage cash flow and prepare for tight cash flow periods, unexpected expenses, or funding delays.

Developing a liquidity policy for your non-profit

Beyond financial statement disclosures, non-profits benefit from adopting a formal liquidity policy. This policy can outline:

Reserve targets (e.g., maintaining three months of operating expenses).
Board-designated funds and when they can be used.
How lines of credit or short-term investments fit into the liquidity strategy.

Such policies not only promote internal accountability but also demonstrate strategic stewardship to donors and funders.

Liquidity and mission resilience

Having strong liquidity isn’t just about financial compliance: it’s about sustaining your mission. Organizations with limited access to liquid assets may face tough trade-offs, such as delaying program launches, cutting staff, or declining grant opportunities.

On the other hand, organizations that actively manage liquidity are better positioned to innovate, expand, and serve their communities, especially during times of economic uncertainty.

Wrapping it up

Liquidity is a foundational aspect of non-profit financial health. By complying with FASB’s updated disclosure requirements and adopting strong internal policies, non-profits can improve transparency, earn donor trust, and build long-term resilience.

Whether you’re preparing your next audit or simply looking to strengthen your organization’s financial footing, understanding liquidity and communicating it clearly is key.

Need help reviewing your liquidity disclosures or creating a liquidity policy? Our top non-profit pros are, as always, here to help. Contact us today for a free consultation.

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