While the non-profit sector shares many similarities with for-profit businesses, its unique characteristics can make it susceptible to financial difficulties. The most common problems non-profits face are cash flow management and cash shortages.
These challenges happen for many reasons, including an unexpected decrease in donations, an increase in expenses, or a delay in grant funding. Challenges faced by non-profits include the following:
- Irregular Funding: Donations and grants may not align with the timing of expenses.
- Restricted Funds: Some funds are earmarked for specific purposes, limiting their use for general operational costs.
- Economic Fluctuations: Economic downturns can lead to decreased donations and increased demand for services.
- Too Few Funding Sources: Over-reliance on a single donor or funding stream can be risky.
Effective cash flow management is crucial for Canadian non-profit organizations (NPOs) to ensure financial stability, fulfill their missions, and maintain stakeholder trust. Let's dive into the core aspects of cash flow management for Canadian non-profits.
Understanding Cash Flow Management
Cash flow management is monitoring, analyzing, and optimizing the inflow and outflow of cash to ensure that an NPO can meet its financial obligations. Specifically, it refers to the process of tracking, analyzing, and optimizing the net amount of cash receipts minus cash expenditures over a specific period. It involves forecasting incoming funds, scheduling outgoing payments, and ensuring that an organization maintains enough liquidity to meet its obligations when they come due.
For non-profits, this means having enough cash to cover operational costs, program expenses, and unexpected financial demands while aligning with their mission-driven goals. To summarize, cash flow management is essential for non-profits to maintain operational efficiency, fulfill their mission effectively, and ensure long-term sustainability. By proactively managing their cash flow, non-profits can better adapt to financial uncertainties and continue to fulfill their mission and mandates.
Why Cash Flow Is Important for NPOs
Financial Sustainability and Program Continuity
- Helps avoid insolvency or financial distress.
- Non-profits are mission-driven and need to ensure that their programs and services run uninterrupted. Adequate cash flow allows them to maintain staffing, procure necessary resources, and fulfill their commitments to the communities they serve.
Donor Confidence
- Transparent cash flow practices build trust with donors, grantors, and sponsors.
- Positive financial health can attract additional funding.
Regulatory Compliance
- Aligns with the requirements of the Canada Revenue Agency (CRA) and other regulatory bodies.
- Facilitates accurate reporting and auditing processes.
Strategic Planning
- Enables better decision-making regarding expansion, program development, and resource allocation.
- Helps in setting realistic budgets and financial forecasts.
Irregular Funding Sources
- Non-profits often rely on donations, grants, and fundraising events, which can be unpredictable and fluctuate seasonally or annually. Effective cash flow management helps them navigate these inconsistencies by planning for periods of low income.
Restricted Funds
- Donations and grants may come with restrictions on how and when the funds can be used. Proper cash flow management ensures that restricted funds are allocated appropriately without jeopardizing the organization's ability to cover general operating expenses.
How to Manage Cash Flow
1. Establish a budget
A budget can help non-profits better plan their expenses, income, and capital outlays and identify areas where they can cut costs or generate additional revenue. It can also help nonprofits prioritize their spending and ensure that they are using their resources in the most effective way possible.
Before a non-profit can put together a budget, it must understand its cash flow—the timing of when it receives and spends money. For example, if a non-profit is hosting an event, it will need to have a budget that accounts for upfront costs like venue rentals and catering and the income from ticket sales. Once it has a clear idea of its cash flow, it can map out a budget.
The budget should be approved by the board members or another governing body. Once approved, the non-profit can start implementing the budget and track its actual spending against it.
How to Establish a Non-Profit Budget
- Identify Income Sources
- List all expected revenue streams, such as donations, grants, fundraising events, and membership fees.
- Estimate realistic amounts based on past data and future projections.
- List Expenses
- Categorize expenses into fixed (rent, salaries) and variable (program supplies, utilities).
- Include administrative costs and program-specific expenses.
- Align with Mission Goals
- Ensure funds are allocated to programs that advance your organization's mission.
- Prioritize spending based on impact and necessity.
- Create a Contingency Fund
- Set aside reserves for unexpected costs or revenue shortfalls.
- Review and Adjust Regularly
- Monitor actual income and expenses against the budget.
- Update the budget as needed to reflect changes.
- Involve Stakeholders
- Engage board members, staff, and key volunteers in the budgeting process for transparency and buy-in.
- Ensure Compliance
- Adhere to legal requirements and donor restrictions.
- Prepare for necessary financial reporting and audits.
2. Keep track of your income and expenses
Non-profits must track their income and expenses throughout the year to keep their doors open and continue fulfilling their mission. This is where bookkeeping comes in.
'By tracking income and expenses accurately throughout the year, nonprofits can ensure that they have enough cash on hand to meet their obligations and gain a clear understanding of their cash flows and cash resources. Accurate bookkeeping also allows the organization to generate its statement of activities, statement of financial position, cash flow statement, and statement of operations. This information can then identify areas where there may be overspending, allowing it to actively cut back on these areas and manage its cash flow.
Bookkeeping can also be used to make informed decisions about how to best allocate resources and even how best to budget for the next year. Knowing the exact costs for your organization will allow you to create a more realistic budget and inform the amount of fundraising required to cover your program and operating expenses.
Accurate, timely bookkeeping is fundamental to an organization's financial management. If your organization struggles with financial reporting, you might want to consider outsourcing your bookkeeping to a third-party bookkeeping firm.
How to Track NPO Expenses and Revenues
- Set Up an Accounting System if one isn't already in place
- Choose accounting software suitable for non-profits.
- Decide on cash or accrual accounting methods.
- Create a Chart of Accounts
- List all revenue sources and expense categories.
- Include accounts for restricted and unrestricted funds.
- Record Transactions Promptly
- Enter all income and expenses accurately and promptly.
- Include details like date, amount, and purpose.
- Maintain Documentation
- Keep receipts, invoices, and donation records organized.
- Store documents securely for auditing purposes.
- Reconcile Accounts Regularly
- Match accounting records with bank statements monthly.
- Identify and correct discrepancies immediately.
- Monitor Budget vs. Actuals
- Compare actual financial activity against the budget.
- Adjust spending or fundraising efforts as needed.
- Implement Internal Controls
- Establish procedures to prevent errors and fraud.
- Separate duties among staff handling finances.
- Generate Financial Reports
- Prepare regular reports like income statements and balance sheets.
- Share with board members and stakeholders for transparency.
- Ensure Compliance
- Adhere to legal requirements and accounting standards.
- Report to regulatory bodies and comply with donor restrictions.
- Seek Professional Advice
- Consult with a non-profit bookkeeper.
3. Create a cash flow projection to help you anticipate future expenses and income
When your bookkeeping is accurate and current, you can easily create a cash flow projection to anticipate future expenses and income – and ensure you'll have sufficient cash to fund your programs and operations.
A cash flow projection can help you to better manage your finances and ensure that you have enough money on hand to cover expenses. The projection includes a forecast of your inflows and outflows over a period, usually three to six months. This information can help you to make informed decisions about when to spend, save, or invest funds. It can also help you to identify and address potential financial challenges before they become problems.
By taking the time to create a cash flow projection, you can help your nonprofit stay afloat and better fulfill its mission.
Basic Steps for Creating a Cash Flow Projection for a Non-Profit:
- Gather Historical Financial Data
- Collect past income and expense records to identify revenue and expense patterns.
- List Expected Income
- Identify all anticipated revenue sources (donations, grants, events).
- Estimate amounts and timing of receipts.
- Identify Expected Expenses
- List all planned expenditures (operational costs, program expenses, salaries).
- Note payment due dates.
- Schedule Income and Expenses
- Map out when funds will be received and when payments are due, typically monthly.
- Calculate Net Cash Flow
- Subtract total expenses from total income for each period to determine surplus or deficit.
- Adjust for Seasonal Variations
- Account for periods with higher or lower income and expenses.
- Include Contingencies
- Add a buffer for unexpected costs or delayed income.
- Review and Update Regularly
- Revisit the projection periodically to adjust for actual figures and new information.
- Utilize Financial Tools
- Use bookkeeping software to organize data and automate calculations.
- Seek Professional Advice
4. Make a plan for unexpected expenses
Nonprofit organizations often have to contend with unexpected expenses. Whether it's an unanticipated cost associated with a program change or an emergency repair to your building, these expenses can severely strain your budget.
One way to plan for unexpected expenses is to review your insurance coverage and make sure you have adequate protection. This includes property damage insurance and liability insurance in case someone is injured on your property. By being prepared with the right insurance coverage, you can help minimize the financial impact of an unexpected event. You may also want to consider establishing a line of credit that can be used for an unforeseen expense.
Another way to plan for unexpected expenses is to create a budget. This means estimating how much money you will need to cover unexpected expenses each year and setting aside that amount in your budget. This way, when an unexpected expense does occur, you will already have the funds allocated and won't have to scramble to find the money.
A contingency plan can help ensure that your non-profit will have enough cash flow to weather the unexpected.
5. Have a reserve fund to cover short-term cash shortages
For a nonprofit organization, having a reserve fund can be crucial in maintaining its financial stability.
A reserve fund is essentially a savings account that the nonprofit can draw from in times of need. This can help the nonprofit cover unexpected expenses or take advantage of opportunities. Additionally, having a reserve fund can help the nonprofit weather economic downturns. If donations decline during a recession, the nonprofit will still have access to funds that can be used to pay employees and keep the organization running.
By setting aside money regularly, nonprofits can ensure they have the resources needed to maintain operations during difficult times. Having a reserve fund can also help nonprofit organizations build credibility with potential donors and investors. Donors and investors are more likely to support organizations with a solid financial foundation, and a reserve fund can give nonprofit organizations the stability they need to attract this type of support.
6. Don't take on unnecessary debt
For nonprofit organizations, taking on debt can be a double-edged sword.
On the one hand, debt can help NPOs expand their programs and reach more people in need. However, debt can also put nonprofits in a precarious financial position if they overspend or have difficulty making payments. This can lead to cash flow problems and eventually force the nonprofit to close its doors. As a result, non-profit leaders must carefully consider whether taking on debt is the right choice for their organization.
Before taking on any new debt, consider whether it is absolutely necessary.
- Can you finance the project another way?
- Do you have the resources to pay back the loan and interest charges?
- Is there another organization that can help you with the project?
Answering these questions honestly will help you avoid taking on unnecessary debt and keep your nonprofit on sound financial footing.
7. Seek out grants and other funding opportunities
As a non-profit organization, one of your primary goals is to ensure that you have the necessary funds to carry out your mission. To that end, it's important to understand the different ways to generate cash flow.
One option is to seek out grants and other funding opportunities. There are several databases that can help you identify potential sources of funding, and many non-profits also hire grant writers to help them secure additional funding. However, remember that grants are often competitive and may require extensive documentation.
Other options are engaging in fundraising activities such as galas, setting up an eCommerce site to sell merchandise, or holding virtual fundraisers. These activities can be a great way to generate additional revenue, and they also help to raise awareness for your nonprofit.
Finally, you may also consider partnering with other organizations or businesses. These partnerships can provide much-needed financial support and help you expand your reach and tap into new resources. By exploring your options, you can ensure your non-profit has the funds it needs to continue its vital work.
As a non-profit organization, one of your key priorities should be cash flow management for the long term. Good cash management starts with accurate, timely bookkeeping. Need help keeping your books up to date for better cash flow management and cash visibility? Enkel can help! Contact us to learn more about our nonprofit bookkeeping services.