A Guide to Cash Flow Forecasts for Non-Profits

Omar Visram
A Guide to Cash Flow Forecasts for Non-Profits
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Effectively managing your nonprofit’s finances is always important, but even more so when times are uncertain. Forecasting your cash flow, for example, can help your organization respond and adapt to immediate financial challenges. Equally important, cash flow forecasts are a vital tool for ensuring your nonprofit organization stays financially healthy and viable in the long run.

Understanding Cash Flow Forecasting

A cash flow forecast is a projection of the cash you expect to have coming in and going out. Because it’s based on your organization’s plans and activities for the upcoming year, your annual budget is key in supplying the expected expense and revenue figures for your cash flow projection. 

In short, cash flow projections estimate the amount of cash that will flow in and out of an NPO over a future period. For non-profits, this involves forecasting:

  • Cash Inflows: Donations, grants, fundraising income, membership fees, investment income, and other revenue sources.
  • Cash Outflows: Expenses related to operations, programs, capital expenditures, and other financial obligations.

The primary goal is to ensure the organization maintains a positive cash balance to fund its mission and avoid liquidity issues.

The Importance of Cash Flow Forecasts for Non-Profits

Like most for-profit organizations, your NPO likely has ongoing operating expenses (like rent or program costs, for example) that need to be covered. Unlike many for-profit organizations, however, you may lack regular income.

Whether you’re a director, board member, or financial manager, keeping your nonprofit financially solvent is crucial to ensure sustainable long-term operations. A cash flow forecast can help in several ways:

Tracking performance. Comparing your projections and actual activities against your budget lets you see your financial performance and whether it’s better or worse than you expected. 

Spotting opportunities and challenges. Forecasts make it easier to plan the use of working capital around emerging opportunities and anticipated problems. They allow you to understand potential implications for cash flow to assist with the decision-making process.

Responding to change. While new information or events can lead to a change in plans in any given year, they don’t always warrant revising your annual budget. Cash flow forecasts are an ideal tool for responding to unanticipated change.

Creating Multiple Cash Flow Projections

Many organizations find it helpful to create multiple cash flow projections for various scenarios. This strategy is known as scenario planning, and a cash flow projections template will make it more efficient.

Here are examples of some scenarios you could forecast:

  • Receiving a large unrestricted donation 
  • Losing volunteers due to social distancing
  • Receiving rent in kind (getting free rent for your event space) 
  • Losing funding due to a recession or government cutbacks

The advantage of creating various cash flow projections is that you can plan your response to different outcomes. Creating multiple cash flow forecasts around alternate program delivery methods (like online events, for example) lets you see what income and expenses you can expect.

For comprehensive financial planning, non-profits should integrate operating and program expenses into their cash flow projections. Here's how:

Consolidated Projections

  • Combine all cash inflows and outflows to provide an overall picture of the organization's financial position.
  • Identify periods of potential cash shortages or surpluses.
  • Facilitate strategic decisions on resource allocation between operations and programs.

Segmented Projections

  • Create separate projections for operating and program activities.
  • Allows for detailed analysis and targeted financial management.
  • Useful when certain funds are restricted to specific uses.

Scenario Planning

  • Develop multiple projections based on different assumptions (e.g., optimistic, realistic, and pessimistic scenarios).
  • Assess the impact of changes in funding levels, program costs, or operating expenses.
  • Prepare contingency plans for potential financial challenges.

Building Cash Flow Forecasts for Nonprofits

Before you start building your cash flow forecast, you’ll need to determine whether it should be based on operating expenses, program expenses, or both. To recap, operating expenses are costs associated with the organization's general administration and day-to-day functions. Program expenses are costs directly tied to implementing specific programs or services that fulfill the organization's mission.

Let's break out some key differences between operating and program expenses.

Purpose and Focus

  • Operating expense-based projections focus on the organization's overall financial health and sustainability to ensure that the core administrative functions are adequately funded. Highlight the organization's ability to cover fixed and recurring costs.
  • Program expense-based projections concentrate on the financial needs of specific programs or projects and assist in assessing the feasibility and budgeting for individual initiatives.

Revenue Alignment

  • Operating expenses are typically funded through unrestricted funds, general donations, membership fees, and fundraising events. Cash inflows may be more predictable but fluctuate based on donor engagement and fundraising success.
  • Program expenses are often funded through restricted funds, grants, and donations earmarked for specific programs. Cash inflows are tied to grant schedules, donor agreements, and program-specific fundraising efforts.

Timing and Cash Flow Patterns

  • Operating expenses are regular and recurring with predictable payment schedules (e.g., monthly rent, utilities). Projections focus on ensuring liquidity to cover these ongoing costs.
  • Program expenses may have irregular or project-based expenditures depending on program timelines. Cash outflows can be lumpy, with significant expenses occurring at certain stages.

Budget Flexibility

  • Operating expenses are less flexible, as they cover essential functions that keep the organization running.
  • Program expenses are more variable and can be adjusted based on funding availability and strategic priorities.

For example, NPOs with a lot of restricted funding typically need to monitor their operating funds closely since most of their cash is restricted to program activities. 

Once your expense base is clear, you can create the two components that make up most cash flow forecasts for nonprofits.

1. Anticipated Cash Collection

Examples: Donations, fund-raising receipts, grant payments, fee for service revenue

Use your income statement and budget to determine your expected cash inflow, and remember that it can vary significantly. Income from a fundraising event, for example, may be impacted by whether tickets are sold, when they’re sold (in advance or at the door), payment types accepted (cash, cheque, credit), and when those payments enter your bank account.

Note: If your organization uses the accrual method of accounting, you should expect differences between cash received on your projection versus revenue recorded on your income statement.

2. Anticipated Cash Payments

Examples: Operating expenses (like payroll costs, rent, administrative costs), program costs (like events or honoraria)

Use your income statement and budget to determine your expected cash outflow, and remember that it can fluctuate from month to month. If you host an annual fundraising luncheon in June, for example, expenses for that month will be higher than usual. Understanding your programming and plans for the year ahead will help you forecast accurate expenses.

Note: If your organization uses the accrual method of accounting, you should expect differences between cash payments on your projection versus expenses recorded on your income statement.

Most organizations build cash flow projections for the 12 months ahead, separated by month. Use your statement of financial position (or balance sheet) to find your starting cash balance, then review your forecast monthly - or more frequently if your organization’s cash flow is especially tight. 

Putting Your Cash Flow Forecast to Work

Timing is everything when it comes to cash flow. The biggest benefit of building cash flow forecasts for nonprofits is that they can be used to identify and respond to cash deficits and cash surpluses in advance.

Managing Cash Deficits

Pinpointing a cash deficit in a specific month lets you be proactive about finding ways to manage it:

Increase your fundraising efforts

  • Reach out to donors sooner
  • Submit grant applications earlier
  • Ask current funders to provide payments ahead of schedule

Change the timing of incurred expenses

Delay a new program or project scheduled to launch during a cash deficit month until you have sufficient funds on hand. 

Reduce operating expenses

  • Leverage cloud-based technology to avoid upfront software costs
  • Reduce employee travel
  • Scale back on events and programming
  • Outsource back-office functions  

Reducing operating expenses and being creatively resourceful can help you avoid taking more extreme measures like reducing headcount at your organization.

Apply for loans

Applying for a loan is usually a last resort for nonprofits with serious cash flow issues. There are several different types of loans that nonprofits can conceivably apply for with terms, conditions, interest rates, and amortization periods that may vary. The ideal scenario would be managing your cash flow in a way that keeps you out of this kind of trouble in the first place.    

Managing Large Cash Surpluses

Identifying large cash surpluses in advance helps you determine the best time to invest or pursue growth opportunities, such as:

  • Purchasing GICs
  • Starting an internal project like office renovations
  • Purchasing new equipment
  • Bolstering your reserve fund’s cash balance 

Managing cash flow for nonprofit organizations can be an ongoing challenge due to a variety of reasons, such as increased operating expenses, changes in funding sources, issues with staff retention, and other unpredictable elements. Thankfully, using cash flow forecasts can be an effective way to avoid unexpected cash shortages.

Final Thoughts

Cash flow forecasting is a vital tool for nonprofit organizations, offering a proactive approach to financial management. By anticipating financial trends and potential challenges, nonprofits can navigate uncertainties more effectively and ensure the sustainability of their operations.

For tailored assistance in optimizing your nonprofit's cash flow management, reach out to our team at Enkel. Our accounting services are designed to support nonprofit leaders in achieving their financial goals. Whether you're an existing client or considering our services for the first time, we're here to help you thrive.

Are you looking for a bookkeeping provider that specializes in services for nonprofits? Look no further.

Here at Enkel we have a specialized team with decades of combined experience providing bookkeeping, payroll and controllership services to nonprofit organizations in Canada. If you would like to learn more about how the Enkel team can support your organization with our services built specifically for nonprofits, please reach out to us.

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