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Nonprofit Finance: Cash Flow is Do or Die

As New York’s leading personalized board matching service, folks come to BoardAssist every day looking to make a difference in the nonprofit world. They want us to find them a way to truly be an agent of change on the boards where we place them.  Once on board, they often do just that, like this week’s guest blogger Vanessa Wilson who BoardAssist was honored to place on several boards. Vanessa was absolutely a change agent wherever she served, bringing tremendous value to the nonprofits she supported.  One of the many ways Vanessa was often able to help is showing her nonprofit how to craft a working cash flow model.  (In fact, many of our placements are responsible for crafting the first cash flow analysis their boards have ever had). In this week’s guest post, Vanessa tells us how easy – and important – it is to do this for your board.  

Nonprofit Finance:  Cash Flow is Do or Die

The MOST important finance tool for a nonprofit is its Cash Flow Model.  Several Executive Directors (EDs) have told me they had no idea how calming it would be to have a solid cash flow forecast in place.  They had QuickBooks and year to date financial reports, but they always had this nagging worry about being able to make payroll and rent.   With their cash flow forecast, they had a road map and an early warning system that allows them to react and plan well in advance of running out of cash.

The business model of many nonprofits puts them at risk of running out of cash every year. While expenses such as payroll, rent and utilities may change little from year to year, revenues can be variable and risky.  For the vast majority of nonprofits, a large percent of their revenues come in the form of gifts and grants, which can be uncertain for many reasons.

Why not use these funding/ smoothing options available to many for-profit businesses?

  • Reserves – if nonprofits carry too much in reserves, some funders will not donate.
  • Debt – very few nonprofits have ready access to debt and banks will rarely offer a credit line to a nonprofit. Lenders who specialize in nonprofits are usually interested in asset based projects.
  • Asset sales – service-based nonprofits rarely have hard assets that could be used to generate cash in an emergency and tangible assets owned by nonprofits are needed to deliver services.

The Cash Flow Model is the ED’s friend

So how do you do it?

  1. Start with an excel spreadsheet of 12 months across the top and cash items down the side.
  2. Forecast cash revenues and expenses, by month and roll the forecast forward another 3 months every quarter.
  3. Revenues are reflected in the month the check is expected to be cashed.
  4. Expenses are often more predictable, but need to be forecast carefully for seasonality and variability.
  5. Cash at the end of the month goes on the bottom line. Compare it to what you have in the bank and find out what is going on if there is a difference.

The planning part can get everyone on the same page

  1. Who are the sure funders? Who is risky?  Who needs to be replaced?
  2. When do funders need to be called and applications need to be submitted?
  3. What month does the gala have to be held?
  4. Are we charging enough for our services?
  5. Is this contract too risky because of the timing of payment?

The monitoring part helps everyone to sleep at night

Reviewing the actual to expected cash flow is a great way to focus the Board on the work that needs to be done.  When things are on track or ahead, conversations can focus on successes, growth and strategic initiatives.  When cash flow is short, the ED and Board can have robust conversations about introductions to new funders, more sponsors for the gala, or head-count reductions.  But everyone knows where things are and the conversations can get way out ahead of problems.

So forecasting cash flow and building a cash management CULTURE is critical:

  1. Don’t ever budget a shortfall – Surprises are rarely positive. Best to budget a cushion and then bank some reserves if you have a great year.
  2. Do build some reserves – Educate funders that 6 months of expenses is prudent management.
  3. Do think sustainability – Growth must be funded. While serving more customers and adding more services feel like the right thing to do, the full impact of fixed and variable costs and the demands on the overall organization need to be analyzed carefully.
  4. Don’t be someone else’s bank – What is the timing between delivery of your services and payment for those services. Can an upfront payment be negotiated?
  5. Do understand seasonality of revenues – While most expenses show up every month like clockwork, revenues may not arrive evenly during the year.

 

Vanessa Wilson is a finance professional with 25 years of experience on Wall Street and as a CFO of a small financial services company.  Since her retirement from the securities industry in 2007, Ms. Wilson’s public company and nonprofit board service combined with her work with small businesses, individuals and non-profits, have added further qualifications in board governance, nonprofit finance, and financial education.  Ms. Wilson is valued by colleagues and clients for simplifying complex problems into every day solutions.