Key Cash Flow Management Strategies for Nonprofits

A thriving nonprofit can have grants awarded, pledges committed, and revenue reflected in its financial statements and still be short on cash. The issue is often not whether funding exists, but whether it is available when the organization needs it. Cash flow management helps nonprofit leaders understand what cash is available today and what cash flow looks like on the horizon. Several strategies can help nonprofits manage cash flow more effectively. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

Why Cash Flow Management Is Especially Challenging for Nonprofits

Nonprofit revenue does not always arrive on the same schedule as expenses. Donations may be concentrated around year-end or fundraising campaigns, while grants may be paid periodically or on a reimbursement basis. A new program may also generate payroll and other costs before grant funding arrives. Meanwhile, many operating expenses continue throughout the year regardless of cash inflows.

Restricted funding adds another challenge. The amount in a nonprofit bank account does not necessarily represent the amount available to cover general expenses. Some funds may be donor-restricted and available only for a specific program or purpose. An organization can appear to have a strong cash position overall yet lack the unrestricted cash needed for day-to-day operations.

Key Strategies to Strengthen Cash Flow Management

Effective cash flow management helps leaders see what funds are available now and how expected cash inflows and outflows may affect the organization’s short-term financial position. The following strategies can help nonprofits build a clearer picture of cash needs and prepare for gaps before they occur.

Understand How Much Cash Is Available — It starts with knowing the exact amount of unrestricted, liquid funds that is available to management and the board.  Because of the strict rules concerning funds with restrictions, nonprofits may have cash on hand but have limited flexibility.

An accurate available cash balance also provides the starting point for forecasting. Management needs to know what it can access today before it can reliably project future cash needs. 

Develop a Rolling Cash Flow Forecast — A cash flow forecast looks at when cash is expected to come in and when it is expected to go out. That makes it different from an annual budget, which focuses on expected revenue and expenses on a quarterly and yearly basis. 

A 13-week rolling forecast can be a useful approach because it provides enough visibility to identify potential shortfalls while still being focused on the near-term. The timeframe will depend on the organization. 

When designing the rolling forecast, grant reimbursements should account for processing delays. Restricted and unrestricted cash should continue to be carefully documented, according to accounting standards. Payroll, rent, vendor payments, program spending, insurance, and other regular expenses should also be included. When the accounting records are up-to-date, the board and management understand what funds are available for operations today and future investments tomorrow.

Build Liquidity for Gaps in Funding — For nonprofits, building liquidity is another important strategy. It can help bridge funding gaps without disrupting operations. For example, a nonprofit may know that a reimbursement payment is coming within 30 to 60 days and still need to make payroll before then.

Operating reserves are one source of that flexibility. These are often unrestricted funds, and they can provide a cushion when revenue arrives later than expected or when there’s an unforeseen expense that happens. Three to six months of operating expenses is often used as a general reference point for reserves, but there is no single target that works for every nonprofit.

A line of credit can provide another source of short-term liquidity. It may be appropriate when the organization is facing a temporary timing gap and has a reasonable expectation of incoming cash. It should not become a substitute for addressing a recurring operating deficit. Some nonprofits establish access to credit before it is needed, which provides more flexibility than trying to secure financing at the last minute.

Establish Clear Financial Policies — Cash flow management is stronger when the organization has written policies governing the financial resources and decision-making responsibilities. 

An operating reserve policy can establish a target reserve level and define when those funds may be used. A separate liquidity policy can address how much cash should remain readily available for near-term needs and how the organization plans to manage temporary funding gaps.

Investment policies can help a nonprofit balance liquidity need with investment goals, which is especially useful for continuity during periods of transition or turnover. It outlines requirements of near-term liquidity along with a long-term investment strategy. The idea here is to plan ahead and make important financial decisions before the organization is facing a shortfall. 

Contact Us

Strong cash flow management is an ongoing process. Management and the board will want to revisit cash flow assumptions at least annually and consider involving outside financial advisors when appropriate. If you have questions about the information outlined above or need assistance with another nonprofit 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.