While the nonprofit sector shares many similarities with for-profit businesses, they also have some unique characteristics that can make them susceptible to financial difficulties. The most common problems faced by nonprofits are cash flow management and cash shortage.
This can occur for a variety of reasons, including an unexpected decrease in donations, an increase in expenses, or a delay in grant funding. Cash flow management and cash shortages can be crippling for a nonprofit, preventing it from meeting its financial obligations and ultimately leading to its closure.
To avoid this, it is important for nonprofit organizations to proactively manage their cash inflows and outflows, and take steps to reduce the risk of a shortage. In this blog post, we will discuss some tips for improving cash flow for nonprofit organizations.
1. Establish a budget and stick to it
Nonprofits rely on donations and grants to fund their operations, which can make it difficult to predict and manage their cash flow.
A budget can help nonprofits to better plan for their expenses, income, and capital outlays, and identify areas where they can cut costs or generate additional revenue. It can also help nonprofits to prioritize their spending and ensure that they are using their resources in the most effective way possible.
Before a nonprofit can put together a budget, they need to understand their cash flow – the timing of when they receive and spend money. For example, if a nonprofit is hosting an event, they will need to have a budget that accounts for the upfront costs of things like venue rentals and catering, as well as the income from ticket sales. Once they have a clear idea of their cash flow, they can start to develop a budget.
The budget should be approved by the board members or another governing body. Once it is approved, the nonprofit can start to implement the budget and track their actual spending against it.
2. Keep track of your income and expenses
In order to keep their doors open and continue fulfilling their mission, nonprofits must carefully track their income and expenses throughout the year. This is where bookkeeping comes in.
By carefully 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 their statement of activities, statement of financial position, cash flow statement, and statement of operations. This information can then be used to identify areas where there may be overspending, allowing them to actively cut back in these areas and manage their 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 the financial management of the organization. If your organization is struggling with proper financial reporting, you might want to consider outsourcing your bookkeeping to a third-party bookkeeping firm like Enkel.
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 of time, typically 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.
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 put a serious strain on 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 as well as 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 in the event of an unforeseen expense.
Another way to plan for unexpected expenses is to create a budget for them. This means estimating how much money you will need to cover unexpected expenses each year and then 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.
By having a contingency plan, you can help ensure that your nonprofit will have sufficient 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 to cover unexpected expenses or to take advantage of opportunities that arise. Additionally, having a reserve fund can help the nonprofit to 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 on a regular basis, nonprofits can ensure that they have the resources they need to maintain operations during difficult times. Additionally, having a reserve fund can help nonprofit organizations to build credibility with potential donors and investors. Donors and investors are more likely to support organizations that have 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 overspend or take on unnecessary debt
For nonprofit organizations, taking on debt can be a double-edged sword.
On the one hand, debt can help nonprofits 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, nonprofit leaders must carefully consider whether taking on debt is the right choice for their organization.
Before taking on any new debt, carefully consider whether or not 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 nonprofit 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 have a solid understanding of the different ways to generate cash flow.
One option is to seek out grants and other funding opportunities. There are a number of databases that can help you identify potential sources of funding, and many nonprofits also hire grant writers to help them secure additional funding. Keep in mind, however, that grants are often competitive and may require extensive documentation.
Other options are to engage in fundraising activities such as galas, setting up an eCommerce site to sell merchandise or hold 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 want to consider partnering with other organizations or businesses. These partnerships can provide much-needed financial support, and they can also help you expand your reach and tap into new resources. By exploring all of your options, you can ensure that your nonprofit has the funds it needs to continue its vital work.
As a nonprofit organization, one of your key priorities should be cash flow management for the long term. Good cash management starts with accurate, timely bookkeeping.