In my work with nonprofits I see that any organization without a substantial base of operating cash can experience cash flow problems. Small to mid-size nonprofits are often localized in an area without a large number of resources to draw from. The most important way to make the most of the resources your nonprofit has is to manage your cash flow.
Importance of Cash Flow for Limited Resources
Many organizations do not have immediate cash to do what’s necessary at a moment’s notice because they do not always anticipate an expense or opportunity. Some good reasons for loosening up your cash flow are:
Timely Payments – Nonprofits have bills to pay, such as building overhead or paying salaries for administrative staff. If you have an office, and most do, utilities and rent can factor in, as well as vendors and suppliers. Being able to make monthly payments on time can avoid hefty fines and fees and preserve relationships between vendors and suppliers.
Unanticipated Needs – Nonprofits have a tough time anticipating needs. They supply services not only for the organization but for people and communities outside of the organization. Having cash at the ready for those unanticipated needs is always an excellent way to function.
Natural Enemies of Cash Flow
Nonprofits face challenges with keeping the cash flowing. Some of those challenges are listed here:
- Unexpected Events –Unexpected events can happen at any time. You can’t possibly plan for every emergency or need that may arise in your community. Many times, an unexpected event is the first thing to knock a nonprofit financially off track.
- Timing for Money Intake – You can’t always predict the timing of donations and grants. It will take reasonable estimations and previous data to formulate a plan around the inflow of cash.
- Deficit Operations – Deficit operations means you do not take in as much money as you send out. This deficit is hard to come back from without a substantial one-time donation.
- Lost Opportunities for Mission Building – Opportunities to begin new programs can have a short window of time in which to act. Without cash flow, many good possibilities can be missed.
Help For Your Cash Flow
Having a structured plan in place for cash flow is ideal. Here are the steps to take:
1. Know Your Resources – Always start with an accurate accounting of your cash and other resources.
2. Make Accurate Projections – Stay conservative when estimating your future income for the worst possible scenario. Keep your estimation realistic.
3. Use Dates, Not Months – Get the exact dates that payments are due and create a payment system around those dates. Relying on static monthly projections allows for struggling months when debts pile up.
4. Anticipate Payroll – Your employees pay rent, mortgage, and utilities on specific dates. Set up your payroll based on regular payments and anticipate their salaries or hourly wages. Anticipate months that have extra payrolls.
5. Set Up Speedy Receivables and Patient Payables – Put in place whatever systems are necessary to avoid long waits for your receivables. Create shorter net terms, make personal calls for collections, and give folks opportunities to pay via credit card or ACH and e-checks without fees. Slow the roll of payables by avoiding large lump sum payments. Do not buy, hire, or start a new program or project that you cannot immediately afford with remaining cash flow in place.
These areas are the right starting place for analyzing your nonprofits' cash flow management. Need a comprehensive, customized plan?
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.