Cash flow considerations crucial for nonprofit management

You have a great mission. Wonderful clients. An excellent network of donors, volunteers and staff. But you can’t fulfill that mission successfully without cash to pay employees or the light bill.

As donations have decreased nationwide in the current economy, cash flow management has become especially critical to nonprofits.

Two issues are particularly important:

  • An adequate cash supply to cover all expenses and provide a buffer fund
  • Timing of cash inflow.
  • Since a nonprofit may not sell goods or services every day of the week, cash flow can be erratic and very seasonal.

Your cash flow budget

Most nonprofits prepare annual budgets, a sometimes lengthy and painful process as ambitious plans get cut down to realistic goals.

Perhaps your budget includes a membership drive, grant funds, fees for services, corporate donations and fund-raisers. Those generate cash.

And, most likely, the budget includes donations of time, goods and services, all those essential “pro bono” or “in-kind” freebies. They help the organization fill the gaps in providing services or when carrying out fund-raising activities. Your nonprofit status allows you to receive free labor and goods, an advantage for-profit entities don’t have.

When looking at your budget, identify your actual cash needs: employees, rent, lights, heat, office supplies, travel, program supplies, etc. Below is a sample showing some of the most common expenses.

Helping Hand Nonprofit Expenses Cash Needed In-kind Estimate
Employees & taxes $108,000
Rent 20,000 $5,000
Telephone 2,400
Utilities 3,000
Program supplies 50,000 25,000
Professional fees 2,000 5,000
Office supplies 3,600 1,000
Travel 5,000
Reserve account 10,000
Total $204,000 $36,000

 

According to the above, you will need to raise $204,000 in actual cash dollars.

There are many possible mixtures of funding sources, but the situation is complicated by funder requirements. Many nonprofits find themselves “chasing the money” by taking on grants or projects that move them off mission just for the dollars. The lack of operational dollars is a prime driver of this trend since many granters don’t offer general support.

The ideal approach is to identify grants that help you fulfill your goals, then fill in the gaps with memberships, fee for services, fund-raisers or donations. These funds are often unrestricted as to their use. A mini-budget for each revenue source makes sense, so you can see where costs can legitimately be charged.

Covering employee costs is especially important. Hiring someone creates a legal obligation to pay them, and you don’t want this requirement butting up against funding restricted to certain tasks or projects. Administrative and overhead employee costs need to be watched very closely as most grants have limited overhead dollars.

A sample employee allocation follows:

Employee Grant #1 Grant #2 Unrestricted dollars
Program employee $20,000 $30,000 $5,000
Administrative asst. $2,000 $5,000 $15,000

 

To clarify – being a nonprofit does not mean that you can’t “make a profit” by delivering services for less than revenue earned (except for most grants).

It means that any excess is channeled back into the organization rather than taken out by owners or managers, as would happen in a for-profit business. It doesn’t make sense for a nonprofit not to have funds in the bank to cover essential bills while waiting for sources to come in.

Your cash flow projection

The next step, after you have developed a cash budget and identified sources of funding, is to prepare a cash flow projection that brings the timing of revenue and expense together. If you have multiple sources, you will likely have money coming in erratically rather than equally every month. However, your fixed monthly costs will need to be paid regardless.

State and federal grant funds can be especially tricky. These funds are often delayed by funding hang-ups or just plain old red tape. For grants that are billed after expenses are incurred, the payment can take 30 to 45 days to come in.

Below is a sample cash flow projection that shows a possible scenario.

Beginning Cash $10,000 -$646 -$4,292
Cash In:
Fundraiser $5,000 $2,000
Donations $10,000
Grant (billed) $20,000
Total cash In $5,000 $12,000 $20,000
Total cash available: $15,000 $11,354 $15,708
Cash out:
Payroll $9,000 $9,000 $9,000
Rent $1,665 $1,665 $1,665
Telephone $200 $200 $200
Utilities $250 $250 $250
Program supplies $4,166 $4,166 $4,166
Office supplies $165 $165 $165
Travel $200 $500 $300
Reserve account
Total cash out: $15,646 $15,646 $15,646
Cash position -$646 -$4,292 $62

 

You can see how quickly a cash reserve gets absorbed by ongoing costs.

Cash flow management for a nonprofit can be complex, with timing and allowable spending issues sometimes conflicting.

But it makes sense to put your goals and requirements on paper and honestly assess cash needs and possible shortfalls. Your clients, staff and supporters are depending on your financial solvency.

Info@hkpseattle.com