How Nonprofits Can Manage Cash Flow During Financial Challenges

When times are good, knowing your cash flow can help you find opportunities for investment. But when your organization faces funding uncertainty, strong cash flow planning can help you make data-driven decisions that provide a clear perspective and breathing room.

In a Q&A conversation with consultant and nonprofit CFO Andrew Horrow, many people asked about ways to understand cash flow when funding sources were fluctuating. Here are a few of his suggestions for tracking and managing your cash flow, along with strategies to help your nonprofit stay flexible during times of financial uncertainty.

Understanding Your Cash Flow

Your cash flow is a measurement of the liquid assets your organization has on hand at any given time. While you may already have an annual budget and are reporting against it, the question remains: are you planning for cash? The distinction lies in the details of your financial operations.

Having a detailed view of your cash flow involves knowing when and how funds are received and expended. For instance, how are you paying vendors? Are you planning payments or simply paying invoices as they come in? By having a 90 to 120-day view of your cash flow, you can identify when dollars come in versus when they go out. This foresight allows you to anticipate and prepare for any funding gaps, helping you return to the daily operations of your mission-driven work with confidence.

How Cash Flow Planning Helps You Make Better Decisions

Effective cash flow planning enables you to foresee potential gaps in your funding and take preemptive action. Knowing when you might have gaps and how significant they will be allows you to initiate conversations about revenue diversification before it’s too late.

Here are some of the key benefits of robust cash flow planning:

• Improved Revenue Diversification: By identifying potential shortfalls early, you can explore and engage in discussions on diversifying your revenue streams.
• Enhanced Vendor Management: When you have a clear picture of your future cash flow, you can better manage your relationships with vendors and set up payment plans that create consistency and reliability.
• Transparency with Staff and Board: Clear and accurate cash flow reports build transparency with your staff and board, fostering trust and informed decision-making.

Good cash flow planning helps you spot potential trouble before it has a chance to derail your strategic goals.

How to Manage Your Cash Flow

Managing cash flow effectively requires the right tools and practices. Here are some actionable steps to help you get started:

Use a Cash Flow Planning Tool

Find a cash flow planning tool that suits your organization’s needs. There is a fine line between building a perfect tool and one that becomes onerous to set up and maintain. Begin by taking your monthly budget and assuming you pay everything on the first of the month. Overlay this with when you expect to receive funds and tweak the timing of your invoices accordingly. This will give you a clearer picture of your cash flow over time.

Prepare Rolling Cash Flow Forecasts

Prepare rolling cash flow forecasts on a monthly or even weekly basis. Use these forecasts to engage your board in conversations about scenario planning and revenue diversification. If it appears that you will need to bridge a gap, speak with your bank early about establishing a line of credit. This proactive approach ensures you have a fallback option if needed.

Use Budget Scenarios in Your Fund Accounting Tool

If you’ve already thought about what would happen if a large grant didn’t come through or a major donor didn’t send a check this year, you’re already halfway to a solution if it happens. Using the budget scenario features in your fund accounting tool allows you to plan for various financial situations, including worst-case scenarios, and helps you prepare for uncertainties in funding.

Set Up Payment Plans with Vendors

Establishing payment plans with vendors can create more consistency in your cash flow. This can be as simple as paying your semi-annual insurance premiums every month or setting up automatic payments instead of waiting for invoices to arrive. It’s important to get something on paper to start. This practice not only helps maintain good relationships with your vendors but also ensures that your cash flow remains steady.

Efficiently Reporting on Cash Flow

Reporting on cash flow should be done in a way that your stakeholders can easily understand, but don’t oversimplify. It’s too easy to hide critical information in abbreviated reporting. Make sure to provide a high-level overview and attach comprehensive and nonprofit-specific statements that interested board members can delve into.

Understand Your Finance Committee’s Needs

Know what your finance committee needs to see and provide those outputs to them. Tailor your reports to meet their requirements, ensuring that the information is clear and actionable.

Attach Detailed Statements

Attach your nonprofit-specific statements in an appendix so board members can review the details. This transparency allows for better decision-making and ensures that all stakeholders are on the same page.

Cash Flow Analysis During Funding Uncertainty

In an uncertain funding landscape, nonprofits must be proactive in planning and diversifying their funding sources. Here are some strategies to consider:

Cash Planning

Review your cash flow statements to know exactly where the gaps might be based on your budget scenarios. Knowing when and how big a gap might be will help you plan your next steps.

Understand Program ROI

Identify programs that are more profitable and consider leaning on them more heavily. Cutting back on unprofitable programs—at least temporarily—while you focus on more profitable ones can give you some time to experiment or identify new income sources.

Lines of Credit

Do you have a line of credit? Knowing you have a fallback option to fill funding gaps can provide peace of mind. Engage with your banking partner to understand the options available to you.

Reserve Planning

Aim to have 90 days’ worth of operational reserves. This includes being able to cover salaries and rent. If you don’t currently have 90 days, consider identifying regular donors or board members who can support building your reserves.

Consistent Revenue

Work with your development team to build or ramp up your monthly giving program. Work with affiliate programs, like local grocery stores, that can provide a regular monthly or quarterly stream of income without much effort. Knowing you have some regular income can help with cash flow.

Scenario Planning

Create a budget that zeroes out any government funding and make a plan from there. This conservative approach ensures that you understand any potential gaps and can prepare for them.

Staying Resilient with Cash Flow Planning

Understanding and monitoring your cash flow is indispensable for any nonprofit organization, especially in times of funding uncertainty. By planning effectively, utilizing the right tools, and engaging in proactive scenario planning, you can ensure your organization remains nimble and resilient. The ability to anticipate financial gaps and take timely action can make all the difference in achieving your mission and sustaining your impact. Remember, a well-managed cash flow not only supports your current operations but also paves the way for future growth and stability.

Want to learn more about how nonprofit CFOs can lead their organizations through times of funding uncertainty? Join the Ultimate Nonprofit CFO webinar series for conversations on navigating the complex and changing landscape of nonprofit finance.