Managing Nonprofit Cashflow
Nonprofit organizations face unique challenges when it comes to managing cash flow. Unlike for-profit businesses, nonprofits rely heavily on donations and grants to fund their operations. This means that their income is often unpredictable and varies from month to month. Moreover, there is pressure from donors to ensure that all contributions are used directly for the cause, leaving little room for overhead costs such as salaries, rent, and utilities.
This makes cash flow management particularly important. It’s well worth their while to understand what cash flow management entails and how best to go about it so that they can maximize every cent.
Understanding the Importance of Cash Flow Management for Nonprofit Organizations
Cash flow management is crucial for nonprofit organizations, as it enables them to monitor cash inflow and outflow. Determining where and when funds come from and what they are used for helps nonprofits identify patterns so they can create a structured plan to best match payments with periods of high income. For example, timing grant income with the copier and printer rent.
Monitoring cash flow trends can help nonprofits ensure that they always have sufficient cash on hand to cover daily running costs. It also enables nonprofits to plan fundraising events to ensure they can cover current and future expenses.
Having a clear understanding of cash flow can help nonprofits make informed decisions about the timing of purchases, investments, and other financial commitments.
Nonprofits must consider the impact of cash flow on employees and the public at large. Unforeseen cash flow shortages can have a ripple effect on the organization’s ability to pay staff, deliver services, and fulfill its mission, which could lead to a loss of donor confidence and trust.
Best Practices for Managing Cash Flow in Nonprofit Organizations
Managing cash flow in nonprofit organizations requires careful planning and consistent monitoring. Here are some best practices that can help nonprofits manage their cash flow effectively:
1) Review cash flow
Reviewing cash flow monthly provides a picture of the organization’s financial situation. They can identify opportunities to increase cash flow and spot expenses that they can potentially reduce or even eliminate.
Furthermore, cash flow reviews identify potential problems and enable them to take corrective action.
2) Outsource cash flow management
Not all NFPs can afford a dedicated financial department or even a full-time in-house accounting team to keep an eye on cash flow. Outsourcing cash flow management, however, is a cost-effective way to benefit from the expertise and resources of a firm that specializes in nonprofit accounting.
The NFP gets accurate financial reports and advice from an expert to help them make informed financial decisions for the short- and long-term. Additionally, expert outsourced providers are partnered with technology providers, such as Sage Intacct, who have specialized processes for non-profits that can help to maintain centralized control and distribution of responsibilities within one platform.
Proactive Strategies for Optimizing Cash Flow in Nonprofit Organizations
Rather than being victims of cash flow, nonprofit organizations can adopt a proactive approach that enables them to actively increase income and play a greater role in managing their expenses by negotiating more favorable terms with creditors.
How to Optimize Cash Flow
1) Diversify Revenue Streams
Nonprofits that depend on a single source of income put themselves at risk if that source dries up. Diversifying revenue streams can help stabilize cash flow and reduce the risk of cash flow shortages.
Some ways nonprofits can diversify their revenue streams include:
- Applying for grants from different organizations.
- Soliciting donations from individuals and businesses.
- Holding fundraising events.
Selling products or services related to the nonprofit’s mission.
2) Renegotiate Payment Methods and Debt
Renegotiating payment methods and debt can help nonprofits optimize their cash flow. For instance, you can ask a supplier for a “charity discount” and if they’re not willing to reduce prices you can ask for longer payment terms or alter the date payment is due to coincide with income.
If your supplier refuses to budge, don’t be afraid to shop around. Also investigate other options that could add to the NFPs value. For instance, instead of paying rent, it might make more financial sense to purchase premises.
3) Understand Your Cash Flow Statement and Plan Expenditures
Nonprofits should review their cash flow statements regularly and plan weekly and monthly expenditures. By understanding cash flow statements, nonprofits can make informed decisions about their spending and ensure that they have sufficient cash reserves to cover their expenses.
One way to plan expenditures is to prioritize expenses based on their importance; for example, rent, salaries, and costs specific to your NFP, like additional blankets, pillows, and beds for a homeless shelter. There should always be enough income to cover these essentials.
It’s also important to have a contingency plan to cover unexpected expenses or emergencies. The plan should include maintaining a cash reserve that can cover several months’ worth of expenses.
4) Manage and Understand Restricted Funds
Restricted funds have been earmarked for specific purposes, such as a grant or donation. Nonprofits should ensure that they understand the restrictions attached to these funds and manage them properly.
Nonprofits should also ensure that they have sufficient cash reserves to cover any expenses associated with managing these funds, such as auditing or reporting requirements. Mismanaging restricted funds can result in penalties or legal consequences that can negatively impact a nonprofit’s cash flow.
5) Maximize ROI from Programs
Nonprofits should evaluate their programs regularly to determine their return on investment (ROI). Programs that are not generating sufficient ROI should be revisited to see if they can be adjusted and made more impactful. If not, they might need to be removed to free up resources for more effective programs.
Nonprofits can also explore ways to maximize ROI from their programs, such as collaborating with other organizations or introducing new revenue streams. By maximizing ROI, nonprofits can improve their cash flow and ensure that they are using their resources effectively.
Outsourced accounting, bookkeeping, and financial management accompanied by leading tools, such as Sage Intacct, and expert advice can be the difference between turning a negative cash flow positive.
Using accurate and transparent information provided by your accounting partner can save important initiatives and allow you to adhere to your mission and reach your goals.