Jump to the bottom to hear Justin explain this.
What Should You Actually Do With Profits? A Cash Reserve Framework for Hospices and Nonprofits
Most organizations that find themselves with extra cash do one of two things: spend it on something that feels urgent, or let it sit in a checking account collecting dust. Neither is a strategy — and both leave you reactive when something unexpected hits.
Over the years I’ve developed a waterfall approach to cash reserves that I’ve implemented with my own practice and with the organizations I serve. It works for for-profits. It works for nonprofits. And it works whether you’re sitting on a small surplus or a significant one. Here’s the framework.
Start With the Operating Floor: 60–90 Days
Before anything else, you need to know one number: how many days of operating expenses can you cover with the cash you have right now?
I use 60 days as my floor and 90 days as my ceiling. When you’re in that range, you’re not making decisions based on when payroll hits or when a vendor needs to get paid. You can run the organization with clarity. Strategic decisions come from strategy, not survival.
Drop below 60 days and you start watching the balance. Drop below 30 and you’re in crisis mode — and decisions made under cash pressure are rarely the right ones.
For hospice organizations specifically, I push closer to 90 days. The Medicare reimbursement lag could be real: you can do everything right and still be waiting 30 or more days for money you’ve already earned. That lag needs to be built into your floor, not ignored. Additionally census changes could sometime change on a dime.
Once you’re in the 60–90 day range, the waterfall starts. Anything above that threshold gets allocated intentionally — starting with your reserve buckets.
Reserve Bucket 1: Annual Expenses
The first thing excess cash should fund is a reserve for large, predictable annual expenses. These are the bills you know are coming — they’re just not monthly, which is exactly why organizations get caught flat-footed when they arrive.
The one I see cause the most pain: the 13th payroll period. If you run bi-weekly payroll, two times per year a third payroll hits in a single month. Most executives know it’s coming. Few actually set money aside every month so it doesn’t hurt.
The same logic applies to your annual insurance renewal, software subscriptions, and any other large lump-sum payment. The math is simple: total the annual amount, divide by 12, and move that amount into a dedicated savings account every month. When the bill arrives, the money is already there. No scrambling.
Reserve Bucket 2: Capital Expenditures
After your annual expense reserve is funded, start thinking further out. Every organization has a capital expenditure horizon: the roof that needs replacing, the parking lot that needs resurfacing, major facility repairs.
These aren’t surprises. They’re predictable. But organizations treat them like surprises because they haven’t mapped the timeline and started saving systematically.
Pick a realistic dollar amount you can move into a dedicated savings account each month, and give it a 1–3 year target. The number doesn’t have to be perfect on day one. It just has to be intentional. You’re building a fund so that when the capital expenditure arrives, it doesn’t crater your operating cash.
Reserve Bucket 3: IT Refresh
I treat IT refresh separately from capital expenditures — not because it’s more important, but because when the two are blended into one bucket, neither gets adequately funded.
For hospice organizations and non-profits, the need is particularly real. Your team is running on tablets and laptops in the field, and that hardware degrades. My rule of thumb: a 4-year refresh cycle for all devices. Not 5, not 3 — 4.
By year 4, you’re seeing meaningful performance issues and reliability problems. Waiting longer means you’re replacing broken equipment on someone else’s timeline instead of upgrading on yours.
The math: add up the full replacement cost for every device in your organization. Divide by 4 to get your annual savings target. Divide by 12 and move that amount monthly into a dedicated account.
What you’re avoiding is the $30,000–$50,000 emergency refresh — the scramble to replace everyone’s equipment at once when half the team is limping along on aging hardware. It’s painful, expensive, and entirely preventable.
Profit Sharing: The 50/50 Rule
Once your reserve buckets are funded, you’re ready to talk about what to do with profits above those obligations. Here’s the framework: 50% goes to staff. 50% stays with the organization.
I’m a firm believer that when the organization wins, the team should win too. Profit sharing isn’t just generosity — it’s alignment. People who feel the upside of organizational performance are invested in it differently than people who don’t. How you allocate the staff portion is your call — across-the-board bonuses, performance-based payouts, department-level decisions. The mechanism matters less than the commitment.
The 50% that stays with the organization should be also be working. Don’t park it in a checking account. Put it in a short-term CD, a money market account, or an investment portfolio — something growing at a rate meaningfully better than a standard bank account.
The Written Policy: The Conversation Most Boards Have Never Had
Here’s the gap I see most consistently: organizations that have reached real financial health but have never documented how they handle it.
A written cash reserve policy matters for several reasons. For nonprofits, it’s a governance document — it shows watchdog raters, grantors, and your board that you’re managing resources intentionally. For any organization, it answers the question of how we’re going to handle this before the money shows up, when it’s still easy to think clearly.
The policy doesn’t have to be complicated. It should answer: What is our operating floor target? What are our reserve buckets and their funding rules? What is our profit-sharing policy? How do we invest excess reserves? Get it documented, get board adoption, and revisit it annually.
For nonprofits, the Finance Committee is the right place to start. Frame it as strategic planning, not financial reporting. You’re deciding how the organization handles success — a conversation worth having before you need to.
Where to Start Today
If you don’t have a cash reserve policy, start with one number: your current days of cash on hand. Pull your cash balance, calculate your average monthly operating expenses, and see where you stand.
Below 60 days? That’s the immediate priority — build to the floor before you do anything else. Above 90? The waterfall above tells you exactly what to do next, in order.
The framework isn’t complicated. What makes it powerful is the intentionality. When every dollar above your floor has a destination before it arrives, you stop managing cash reactively and start managing it strategically.
Want to Connect?
If you are building something and want to have a real conversation with someone who has been in the trenches, reach out. No pitch. Just a conversation.