In my work with nonprofits I see that any organization without a substantial base of operating cash can experience cash flow problems. What causes them? There are many factors unique to the nonprofit business model, such as seasonal fundraising, annual grant payments, and reimbursement-based contracts. I advise nonprofit leaders to focus on the organization's cash flow.
Cash Flow Projections
One of the essential tools for leaders of nonprofits is a cash flow projection. The projection is a subdocument of your nonprofit budget that estimates not only how much money you’ll receive and spend over the course of a year but also when you’ll receive and spend it.
A cash flow analysis, or forecast, performed on a regular (usually monthly) basis will demonstrate if the revenue coming in produces sufficient cash to pay for obligations. This information clearly reveals a positive cash flow (net gain) or a negative cash flow (net loss).
These monthly cash flow projections compare previous projections with actual figures. Over time, principal changes will become apparent. Many software accounting programs have features that simplify cash flow analysis.
A Tool for Nonprofit Leaders
Although grantmaking organizations and major donors are likely to want to see your budget, your cash-flow projection is a document that is more of a tool for you, your board, and possibly a loan source.
Nonprofit leaders should have a direct role in the development of accurate and useful cash flow projections. Cash flow projections require knowledge and judgment. The earlier cash flow issues are identified, the easier it is to address them. Start by determining if the cash flow shortfall is the result of timing or is an indication of a deficit. This is important because any strategies developed should be designed to match the particular cause.
Managing Cash Shortfalls
If the problem is with timing, you can
- Manage the timing of payments and receipts,
- Improve internal systems, or
- Arrange for a line of credit.
Shortfalls caused by deficits need to be solved by budget adjustments or strategic choices to absorb a near-term shortfall.
All of these options need the input and support of senior management. Managing cash flow is not a one-time activity. A regular – monthly or quarterly - discussion of cash flow projections should become routine practice. A professional accountant can create a cash flow analysis tool that is tailored to your organization with its individual income and expense flows.
Let us help you plan ahead for growth!
Charles P Myrick CPA is a Washington, DC-based accounting firm that specializes in providing CFO services to nonprofit organizations. We provide nonprofit clients with cash flow and budgeting analysis systems that help analyze spending, and re-balance budgets and/or debts for an optimal cash flow. Get in touch today for a complimentary consultation.