By Chris Fields
Do you know the recurring and non-recurring cash flow components of the nonprofit you lead? Do you regularly prepare cash flow projections and assess their implications? How can you optimize access to needed capital and what investments in programs or other mission-related expenditures can you afford to make (or not to make!)? What are the various implications of key resource deployment decisions you are facing right now (best, worst, most likely cases)? Do you find your nonprofit doing “alright”, but wondering where it goes next and a financial roadmap for how to get there? Is your current level of mission growth outstripping your ability to absorb additional program capacity in the near future? Without an accurate understanding of historical metrics when developing a forward-looking picture of your nonprofit’s strategy, the answers to these questions are really just a guess. Understanding cash flow timing, reporting, and forecasting provide supportive insights you, as a nonprofit leader, need to make informed decisions and guide your nonprofit through shifting economic tides.
Often, nonprofit leaders are so focused on serving their clients because community needs almost always exceed available resources, or are focused on paying the bills which are immediately due, that they don’t pause to examine the big picture. Besides money coming in and going out, what are these ebbs and flows revealing about your organization? It’s easy to overlook cash flow analysis in favor of more immediate demands, but there’s risk associated with omitting this crucial step. If you don’t have clear visibility into cash flow and the implications behind it, your nonprofit organization could run into problems or missed opportunities – even when funds are flowing in at a healthy pace and everything seems to be going fine.
A cash flow analysis comprehensively “marries” the statement of activities with the statement of financial position or balance sheet, and helps provide meaningful insights that identify opportunities or close gaps. The impact of timing of key financial resources, both incoming and outgoing, can also be analyzed to determine how variances impact the ability to meet your mission.
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Even for a nonprofit organization, a level of operating leverage can be tracked to determine the respective contribution (or cost) to your organization’s cash flow, and how the organization either “deploys” operating cash flow, or “accesses” external cash flow from lines of credit, investments, etc. can be articulated and evaluated.
The benefits are significant. Clarity around the real drivers of an organization’s resources and needs and determining appropriate levels of liquidity allows for optimal decisions about making investments in the mission or a particular program, taking on new debt, or determining whether that attractive opportunity is truly a good idea right now.
Establishing tools and mechanisms to monitor your cash flow also helps you identify issues that could impact the long-term strategy, or even threaten long-term mission viability, while there’s still time to correct course. A few months of consistently negative cash flow might be a red flag that requires serious attention. A pattern of positive cash flow, on the other hand, can indicate you are on track to meet or exceed annual growth targets. This positive indicator may also imply that your capacity to meet future program demands could be a challenge before you anticipated. This implication could even lead you to need to revise your long-term mission strategy to propel growth.
Does your nonprofit have seasonal cash flow ebb and flow? Many nonprofits do and monitoring cash flow over time reveals this pattern. If the numbers don’t appear seasonal and you’re in the black year-round, you might want to investigate strategies to make better use of the extra cash you’re generating, once you’ve stashed away an adequate cushion for slower times and mission-related emergencies. Assessing the level of “adequate” liquidity cushion is also an important strategy to define, develop, implement, and monitor.
A successful nonprofit not only serves clients well but serves its stakeholders well too, so it can continue to grow and thrive for years to come. Careful attention to short and long-term cash flow and the underlying implications lets you understand how much your nonprofit needs over time, create projections and forecasts so you know what to expect, and make the best decisions possible as you work toward your long-term million fulfillment.
To learn more about how cash flow analysis and forecasting can benefit your nonprofit, contact Chris Fields of our Client Accounting and Advisory services team at Mauldin & Jenkins.
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