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 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 in the future. Because it’s based on your organization’s plans and activities for the upcoming year, your annual budget plays a key role in supplying the expected expense and revenue figures for your cash flow projection.
The Importance of Cash Flow Forecasts for Nonprofits
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 both your projections and your actual activities against your budget lets you track your financial performance and whether it’s better or worse than you expected.
Spotting opportunities & 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 to cash flow as a way 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. Known as scenario planning, a cash flow projections template will make this strategy 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.
If your main source of revenue is in-person events at public schools, for example, COVID-19’s school closures may have closed off that income. 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.
Building Cash Flow Forecasts for Nonprofits
Before you start building your cash flow forecast, you’ll need to determine if it should be based on your operating expenses, program expenses, or both.
NPOs with a lot of restricted funding, for example, 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 2 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 running out of cash unexpectedly.
Conclusion
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.
