Months in the Bank Doesn’t Mean What You Think

Foundations, Boards of Directors and even senior managers often rely on counting Months in the Bank (MIB) to assess financial stability—the higher the number, the better shape the organization must be in. But the MIB measure actually tells very little about financial stability and will often be misleading. Here, we’ll look at why the MIB measure fails to deliver and then briefly explore some better approaches. 

The MIB measure, purports to show how long an organization can continue to operate at its current pace if no more income were received. It does so by dividing existing funds (usually the amounts in various bank accounts) by average monthly expenses:

Superficially, this makes sense. The bigger the number, the longer an organization can survive, the more financially stable it must be. The problem is that this simple result rests on a set of bad assumptions. The MIB measure will also tend to be inconsistent, swinging wildly from month to month. 

Bad assumptions. The MIB measure assumes a) that no more income will come in past a specific date and b) that in spite of the lack of income, expenses will not be reduced. The first is wildly unlikely. The second would require extraordinary recklessness. The assumption of no more income is useful for defining this ratio, but rarely will it be grounded in to reality. 

On top of a bad assumption about income is piled a worse—even insulting—assumption that management would just continue to spend regardless of prospective income. In fact, most nonprofits receive income because they incur expenses. Restricted funds and contract reimbursement are directly related to expenses incurred. Accordingly, termination of a grant or contract will lead directly to a reduction of expenses. 

Variability. The MIB measure can swing wildly depending on when funds are received, the timing of which a nonprofit will often have no ability to control. For organizations that receive income cyclically, a measure taken before the income is received will be misleadingly low and one taken after will be misleadingly high. Individually donations come in late in the year, a September banquet will result in a huge bump, government reimbursements may be erratic, foundation grants show up when foundations decide to send out checks.

The danger of the MIB measure is in feeding a false sense of crisis that leads to poor organizational decisions. Defenders of the MIB measure may claim that it only describes a worst case scenario of which leaders need to be aware. But the measure’s simplicity is compelling and is often presented in the absence of more reality-based information which is both more nuanced and more ambiguous. If better information is present, then the MIB is not useful; if it’s not present, then the MIB is dangerous. 

A Better Option. The need to understand our nonprofits’ financial stability is real, and so is the necessity to work with serious assumptions, even if they carry a degree of uncertainty. 

I’ve written once or twice before about the virtues of the Monthly Cash Flow Projection. The Monthly Cash Flow Projection shows specifically what will happen to your bank balance month after month based on current best assumptions. The Cash Flow Projection can be used to model different assumptions about future income and expenses so various scenarios. Working with a Cash Flow Projection is not as simple as dividing two numbers, and it does require making judgments, but with a little practice, it will prove itself to be invaluable. 

One Step at a Time. . . Sometimes abandoning the MIB measure will not be feasible. The Board may be accustomed to seeing the MIB measure and insist on the clarity it provides. It may take some time to become comfortable with the Monthly Cash Flow Projection. If that’s the case, the following approaches can help make the MIB measure somewhat more useful, by mitigating its weaknesses.

• Provide context. Compare the MIB measure to the measure at the same date in the prior year, just as happens with the balance sheet. Presenting the MIB measure along with the balance sheet offers additional useful context. For example, if the MIB measure this year is lower but receivables are much higher, then the lower number should not be a cause for concern.

• Reduce variability. Average it with other months. A three, six or even twelve month rolling average will smooth out some of the variability and provide a more consistent view of financial reserves.

• More realistic assumptions. To the extent that there is highly stable income, include that in the calculation. If individual donations have fluctuated between, say, $500,000 and $1 million each year, then it will be more realistic to treat $400,000 rather than zero as your worst case income scenario. You can also reduce expenses directly tied to restricted funds that would certainly be cut if those funds were to disappear.

One Good Use for the MIB measure. A nonprofit’s desired reserve level reflects a compromise between sustainability (the more money we can save the better) and impact (the more we spend in support of our mission the better). The MIB measure is a convenient way to express desired reserves because it ties a dollar amount directly to the size of the organization. A much harder question is how a nonprofit can determine an optimum level of reserves. We’ll save that for another article. 

Many folks running nonprofits and sitting on Boards just aren’t that comfortable with financials. So the appeal of the MIB measure is obvious. But the underlying problem with understanding a nonprofit’s stability is that these depend on a variety of factors—too many factors to be captured in a single number. And when we use worst case assumptions to determine that number, the result can be worse than useless. When we expect the Months in the Bank measure to tell us how our nonprofits are doing, we expect too much.