Effective Cash Flow Management for Nonprofits

Many nonprofits have enough funding to support the mission. The challenge is that funding doesn’t always arrive when it’s needed, and it isn’t always ready to pay day-to-day operating expenses. This can create unexpected and unwanted complications and underscores the importance of proper cash flow management. A complete assessment of when expenses need to be paid along with expected revenue can set management up to better understand when cash needs to be available to meet obligations. Managing these timing differences will help the organization serve its community without interruption. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

Understanding Cash Flow 

Nonprofit leaders and board members are often busy developing budgets and reviewing financial statements, so cash flow can sometimes receive less attention. Yet it’s an equally important part of financial management. That’s because cash flow tracks the money moving into and out of the organization. In other words, it shows whether enough cash will be available to meet day-to-day obligations. 

At its most basic, cash flow has two parts:

• Cash inflows are the money coming into the organization. This generally includes donations, grants, membership dues, reimbursement payments, fundraising proceeds, earned interest, investment income, etc.
• Cash outflows are the money leaving the organization to cover program expenses and operating costs like payroll, rent, insurance, and vendor payments.

Understanding when those inflows and outflows occur is just as important as knowing how much funding the organization has. A nonprofit may have grant awards and donor commitments on the books, but that doesn’t necessarily mean the cash is available to cover current expenses. 

Leaders and board members who can see a cash shortage coming have more options to help close the funding gap. The same idea applies with a potential surplus. When the numbers are visible, leaders are better positioned to respond. Donors and grant makers are also known to look more favorably upon organizations that have a plan to ensure future stability. 

Why Cash Flow Can Be Challenging for Nonprofits

For most nonprofits, the challenge is that the timing of the funding doesn’t always match the timing of expenses.

Restricted donations and grants are one reason why. A donor may give money to renovate a building or expand a food pantry, but those funds can’t be used to cover unrelated payroll, rent, or utility bills. A nonprofit may look financially healthy on paper while having much less unrestricted cash available for day-to-day operations.

Grant reimbursement programs create another common challenge. Many government and foundation grants require nonprofits to pay eligible expenses first, submit the required documentation, and then wait for reimbursement. The funding is coming, but the organization still needs enough cash on hand to keep programs operational in the meantime.

Finally, some funding is seasonal. Many nonprofits receive a large share of unrestricted donations from one annual fundraising event or a year-end giving campaign. Those contributions may need to support operations for several months or until the next major source of funding is available.

Building a Cash Flow Management Process

A simple cash flow management process can provide leadership with better visibility into future cash needs, and it allows the organization to respond before a temporary shortage becomes a larger hardship.

• Determine Available Cash — Start by identifying how much cash is actually available for operations. Under current nonprofit accounting standards, organizations already distinguish between funds with and without donor restrictions. Use that information to determine what cash is available for day-to-day activities and what funds are earmarked for a specific purpose or future use. Also consider expected grant payments and reimbursements that have not yet been received and deposited. 
• Forecast Cash Inflows and Outflows — Many nonprofits have a rolling 13-week forecast mapped out for expected donations, grant payments, and fundraising proceeds against recurring costs. Each week, the organization drops the week just completed and adds a new one at the far end, keeping a consistent three-month view. Reviewing that forecast weekly surfaces potential gaps while there’s still time to act.
• Establish a Liquidity Policy — A forecast shows what’s likely to happen; a policy determines how the organization responds. Many boards set a reserve target of three to six months of operating expenses as a starting point, then define when those reserves can be tapped, who approves that decision, and how the reserves get replenished afterward. Some organizations also set up a line of credit in advance, reserved for bridging short-term timing gaps rather than covering an ongoing deficit.

These steps are part of an ongoing cash flow management process, and they are often adjusted to fit the needs of each organization. Advisors can help set up and maintain a process that identifies any upcoming opportunities and challenges, giving leaders and other stakeholders more forward-looking information than other financial reports can often provide.

Contact Us

Effective cash flow management helps nonprofits navigate the timing differences between funding and operations. It’s only one piece of the puzzle, but it plays an important role in supporting long-term financial stability. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.