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Cash Flow Primer for Nonprofit Organizations

Strong programs and sound business practices are not separate parts of an organization, or at least they shouldn't be. Your ability to help people and your understanding of your financial situation contribute equally to your organization's success.

In our experience, nonprofits excel at providing excellent programs that bring critical services to people in need. Because of the extraordinary demands on their time and energy, they don't always give their business practices and systems the attention they deserve. A significant number of nonprofits, for example, do not take advantage of a valuable tool that can help them better understand and manage their finances -- the cash flow forecast.

What is a Cash Flow Forecast?

A cash flow forecast is a realistic projection of your organization's cash situation -- just one aspect of complete financial health -- at any given time, based on what you know about how much money is coming in and how much is going out. Basically, a cash flow forecast is an early warning system for months in which your organization might spend more money than it has. Preparing the forecast at the start of your fiscal year, and then updating it as often as necessary, will show you the potential problems with your cash flow and allow you time to address them. When you foresee a month where cash will be tight, you will have time to think about how to lower costs or raise income during or prior to that month.

Here's a story of a nonprofit that did a cash flow forecast. Boysenberries for Kids (BFK) is an organization dedicated to promoting the health benefits of boysenberries for children all over the world. To start the year off right, BFK decided to do a cash flow forecast in January. We've simplified an actual cash flow forecast to give you a sense of what one looks like and how it works.

January: Going into January, BFK has $1,000 in its bank account. In the chart above, this is represented by the $1000 on the line labeled "cash on hand." After all the money is counted from its New Year's Day Boysenberry Fest, BFK expects to deposit $1,000 in addition to the $1,000 the group receives each month from the Boysenberry Growers Association, for a total of $2,000 in income. Monthly expenses for BFK are always roughly $2,000 to cover the cost of staff and supplies. Therefore, at the end of January, BFK still has $1,000 cash on hand. No worse than when the month started, but no better either.

February: BFK will start out with the $1,000 it ended January with. BFK still expects the check for $1,000 from the Growers Association to come in as promised. Unfortunately the expenses are still projected to be $2,000, which will basically wipe out the bank account by the end of the month.

March: March will start out unhappily with an empty bank account for Boysenberries for Kids. Thankfully that check from the Growers Association will arrive on time, bringing the balance back up to $1,000. Still, the expenses must be paid, pushing $2,000 out the door and leaving a giant hole in the shape of $1,000 in BFK's bank account.

April: The creditors could start calling in April as the bank account remains in the red. We'll stop here lest we give you nightmares.

The result of doing this forecast in January is that you can see before you get to March, or worse, April, what your financial position will be if things continue the way they have been or if you don't revise your plans for earning income or spending money. Given this prognosis, your organization knows it must get into fundraising gear or cut costs quick.

How Can I Get Started?

To get started, review the prior year's bank statements to identify when cash was actually received (not recorded or recognized) in your organization. Then review each month's cash disbursements to identify when expenses were actually paid (not incurred or obligated). This will give you a sense of how much money comes into your organization and when, as well as how much money is spent and when, so you can more accurately project your future cash needs.

You should update your cash flow projections on a monthly basis – doing them only once a year is too "big picture." When updating projections for future months, be sure to compare the current month's actual cash flow to its projection so you can understand why receipts or expenses were different than you thought they would be.

One of the trickiest parts is knowing what cash to count. For example, let's say your organization receives notification of a $25,000 grant for a meeting you will organize and host in six months. The original notification of the grant is a letter from the donor saying the grant check will be sent next month. If this is a donor you have worked with before and can reasonably expect to receive a check from on time, then it is probably safe to record that as income for next month. If you are unfamiliar with the funder it would be wise to wait to record the income until it actually comes in so you don't falsely inflate your cash on hand projection.

Where Can I Get Help?

You will need help if you've never done a cash flow forecast before. You should talk with your treasurer or another financial advisor, and ask other nonprofits you work with what they use to keep track of cash flow. Plenty of good books exist on the subject, including The Cash Flow Management Book for Nonprofits by Murray Dropkin and Allyson Hayden. To find more details about cash flow or sample worksheets, visit www.managementhelp.org or www.NFConline.org and search for "cash flow."

For more information about cash flow and other financial tools, visit any of these sites:
www.iknow.org
www.genie.org
http://www.onlinewbc.gov
www.allianceonline.org

What if I'm Already Having a Cash Flow Emergency?

Here are some Dos and Don'ts for managing through tight financial times:

Do re-assess your purchasing policies. A respected CPA once told us "all nonprofits pay their bills too fast." You should pay your bills when they are due – not sooner – and keep your cash in your own bank account as long as possible. Put any extra cash you have to work for you by opening a money market account (you get higher interest than if your cash is in a direct deposit account). Link that money market account to your cash account for ease of transfers.

Do consult with key advisors. Questions to ask your accountant include:

1. How can I improve the effectiveness of my accounting practices?
2. Are there better ways to manage and project my organization's cash flow?
3. How can I make my management reports more timely and useful?

If your organization is large enough to have investments and investment policies, you are likely already in a relationship with a banking professional.

Questions to ask your banker include:

1. How can I improve the effectiveness of my financial operations?
2. Are there better ways to manage my organization's cash receipts?
3. What are the best systems for cash disbursements?
4. How can I change my banking relationship with you to free up my staff's time?

Do consider leasing rather than buying. Leasing can be a sensible approach. It absolutely makes sense to lease if you can earn more by investing the money than you will pay in lease costs. Even if leasing costs are higher than buying, it may still make sense to lease if your organization needs to hold onto cash to cover negative cash flow in future months. One example of an item that may be better leased than purchased outright is a computer or computer system. The outlay of cash necessary to purchase computers for an entire staff may be a significant portion of your budget. If you lease instead, you can save that money and be earning interest on it (in a good market) instead of investing it in technology that changes quickly anyway. The actual details of deciding whether or not to lease are rather tricky, so consult your treasurer or another financial professional before you sign any agreements.

Do put technology to work for you. You don't need a high-end accounting package – really good results can be had from even a basic accounting package. Put every aspect of your organization's finances on your computer. Use the power of spreadsheet and accounting software to do the work for you.

Don't stop paying obligations where you think they won't get noticed. Some organizations skip payroll tax payments when they're short on cash. This won't work. First, you're taking money that belongs to your employees, and, second, it's illegal and can cost you your tax-exempt status with the IRS.

Don't stop paying your staff, even if they volunteer to take salary cuts or to defer salary payments. Or, if your situation is so dire you must employ this tactic, use it only as a last resort.

Don't take loans from board members or staff and don't take any loan that has unfavorable terms. The need for cash can cloud people's judgment so they take loans that are not in the organization's best interests. Avoid loans at high rates and loans from people connected to your organization (related parties).

Don't invest in an untested revenue generating idea It's rare to make a lot of money with a new venture. When you're in a cash flow crunch is not the time to sink time and money into something unknown.

Don't apply to a bank for money or credit in the midst of a financial crisis Banks will not give loans or open lines of credit for organizations without three years of progressively positive financial statements.

Financial Glossary and Additional Resources

Accrual basis accounting – Revenue is recorded when earned and expenses are recorded when incurred. They are recorded at the end of an accounting period even though cash has not been received or paid.

Audit – This is the perfect picture of what happened for the year just ended. An audit conforms to generally accepted accounting practices and principles and is most useful if it contains comparative data for the prior year. The audit provides a measure of assurance that the financial information contained in it is reliable, but it does not guarantee that the information is reliable; nor does it guarantee that no fraudulent activity has occurred. The audit tells you how an organization funded itself and how it spent the funds it raised. It does not tell you if the organization achieved its budget goals (because audits compare financial information from the current year to the prior year, not to budget goals). One weakness is that the audit looks backward and is frequently issued many months after a fiscal year has ended. One strength is that an audit provides a consistent presentation of financial information from year to year. Audits are produced for external audiences such as funders or government agencies.

Cash basis accounting – Revenue is recorded in the accounting period in which cash is received and expenses are recorded in the accounting period in which cash is paid.

Interim financial statement – This is the perfect picture of what happened for the month just ended. It is called an interim statement because it is produced each month as the fiscal year unfolds. It is only useful if it includes comparisons against budget goals for the year. One weakness is that interim financial statements cannot be issued until several weeks after the month has ended; thus the information is stale. One strength is that the interim financial statements show if an organization is on target to meet budget goals in the year. Interim financial statements are most useful to managers and the board but are also frequently used by external audiences such as funders.

Unified chart of accounts – A movement to standardize accounting methods has introduced the Unified Chart of Accounts, which is a recommended way to keep track of your finances. To learn about the Unified Chart of Accounts, visit http://nccs.urban.org/ucoa/nccs-ucoa.htm.