When I work with nonprofit leaders, I hear about the challenges they face with cash flow. Nonprofits have historically faced a unique funding situation due to the variability of grant funding cycles and donor contributions. I recommend a tool – cash flow projection – that can help organizations maintain financial viability today and in the future.
What Is a Cash Flow Projection?
Your budget details the amount of money coming in – income – and the amount going out – expenditures. When you add a cash flow projection to your financial planning process, you will know when to expect income and expenses. It does this by breaking down your budget into increments of time.
A cash flow analysis performed regularly (usually monthly) is one of the most potent tools in cash management for any nonprofit organization. The cash flow projection or reporting process begins by identifying each month’s anticipated income and concludes with a report of each month’s actual cash flow. The resulting cash flow report clearly shows the actual flow of money through the organization and identifies how much cash is available to pay expenses each month.
Why Is a Cash Flow Projection Important?
Cash flow projections are forward-looking. They forecast surpluses and shortages and allow you to plan accordingly. You need budgets for making strategic decisions and for general oversight of an organization’s health. A cash flow projection is flexible and can be updated to continuously look ahead 12 months regardless of the fixed budget or funding period. With a cash flow projection, you have more options than with your budget.
For example, when you anticipate a shortage, you can:
- Request accelerated payments from funders or donors
- Start a small, targeted fundraising campaign
- Switch payroll to twice a month instead of every other week,
- Postpone major purchases and new hires
- Set up a temporary line of credit to cover an emergency
How Does a Cash Flow Projection Benefit the Organization?
A cash flow projection forces you out of reactionary mode and into a strategic, adaptive mindset by helping your nonprofit see the monthly impact of your financial decisions in advance. Many nonprofit leaders find that using a projection sharpens their understanding of their organization’s cash flow. Since the cash projection impacts program, operations, and fundraising, it can be an effective team development tool. Team members are included in discussions of the organization's business model and understand why key purchases or programs might have to be delayed.
Many nonprofit leaders rely on advice from a professional accountant to provide financial forecasting and cash flow projections that are tailored to your organization with its unique 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 delivering 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 debts for optimal cash flow. Get in touch today for a complimentary consultation.