The Importance of Cash Flow for Nonprofit Organizations
Nonprofits rely on donations to continue doing their good work, but like any other operation, their cash flow must be managed carefully. While these organizations may not turn a profit, they still have expenses. Proper cash flow for nonprofit organizations is key to keeping an organization up and running.
What is Cash Flow and How Does it Relate to Nonprofits?
Cash flow is a term that refers to the cash left after an organization’s expenses have been subtracted from its gross income. Calculating cash flow can help determine whether an organization has enough cash to cover its operations.
Cash flow relates to nonprofits because it helps ensure they have enough money to continue their work.
When cash flow is negative, meaning the nonprofit isn’t receiving enough donations to cover its expenses, it risks having to shut down or cut back on its operations.
Having positive cash flow, on the other hand, offers many benefits, making it worth the time and effort to track and manage.
Benefits of Having a Positive Cash Flow for Nonprofits
Nonprofits should aim to have positive cash flow for a number of reasons, including:
Operations Can Continue
One of the main benefits of having positive cash flow for nonprofits is that they’re able to continue doing their work.
Positive cash flow means that you’re bringing in enough donations to cover your expenses and carry on with your work.
The Organization Can Expand its Mission
In some cases, positive cash flow means not only being able to continue operations, but to expand them as well.
Having the ability to expand your mission means that you can help more people in need or better achieve the organization’s goals.
The Organization Can Build Up its Cash Reserves
Having positive cash flow is the only way a nonprofit can build up its cash reserves. Building up cash reserves means that the organization can stay afloat when they aren’t receiving enough donations, or they can cover unexpected expenses if they should arise.
Practical Steps to Improve Cash Flow for Nonprofits
There are many ways to improve cash flow for nonprofit organizations. Here are some practical steps any organization can take today to start boosting its cash flow:
Understand and Evaluate Cash Flow Statements
One of the most important things you can do to improve your cash flow is learning how to understand and evaluate cash flow statements.
When you’re able to analyze and understand cash flow statements, you can take steps to make improvements in the right areas. You can also answer some important questions, like:
- Will the organization have enough cash to cover the payroll?
- Are there seasonal trends that should be addressed?
- Is the organization able to cover its operating expenses?
Be Smart About Restricted Funds
Unlike for-profit businesses, nonprofits receive inflowing money that’s considered restricted funds. These funds can only be used for items that the grant or donor specifies.
Naturally, restricted funds complicate cash flow management, but the right strategy can help make things a little less stressful.
To be smart about these funds, make sure that you’re using them to cover their category of expenses first. It may seem like an obvious strategy, but it’s an important one to cover. This way, you can use the cash that is not restricted to cover other things those restricted funds wouldn’t have been able to cover.
Common Issues That Impact Negative Cash Flow for Nonprofits
Like any other organization, nonprofits face challenges that can make it difficult to maintain effective cash flow management.
Common issues that impact cash flow negatively include:
- The timing of grants, donations or disbursements
- Unexpected events
- Reimbursement-based contracts
- Changes to payment schedules or sources of revenue
These issues can sometimes lead to late fees, finances charges, lost opportunities and other issues that further affect cash flow.
Fortunately, there are strategies that nonprofits can use to help avoid or overcome these challenges.
Top Strategies for Effective Cash Flow Management for Nonprofits
Proper cash flow management is key if a nonprofit wants to continue and grow its operations.
If you want to know how to improve cash flow and management, here’s an important tip: create projections.
Cash flow projections will give you an idea of what your cash flow will look like in the future, so you can make more informed decisions to keep cash flow positive.
Here are some things to consider when creating projections:
- Make sure that you’re starting with an accurate cash balance when creating statements and forecasts
- Be mindful of your payroll schedule.
- Consider the timing of your payments and receipts.
- Make a note of any lump sum payments.
- Be cautious about planning to use restricted grants for future expenses.
Leveraging Technology to Monitor and Improve Cash Flow for Nonprofits
Managing cash flow can be a daunting and time-consuming task if you’re doing it manually, especially if you have a large operation.
Using an automated cash flow forecasting tool will help save you time and reduce the risk of errors that could be financially devastating for your organization.
Learning how to improve cash flow will allow your nonprofit to continue its mission. Use the tips above to start taking control of your cash flow today.