Nonprofit organizations use cash budget, or cash-flow forecast, to manage cash flow and predict cash-flow gaps. Cash budget forecasts and estimates cash revenue and expense on a quarterly or monthly basic.
When dealing with a temporary cash shortage, nonprofits use these strategies:
Arrange for a line of credit or loan from a bank
Collect receivables quicker to gain liquidity
Have fundraising event or campaign earlier than scheduled
Lease an equipment or finance it to pay over time
Delay payments to vendors
When dealing with a temporary surplus, nonprofits use these strategies:
Expand existing programs
Develop new program and opportunities
Reserve capital for longer-term investments
Support other projects inside and outside of the community
Contrary to what most people think, a nonprofit must make a profit in order to operate. The cash flow for a nonprofit organization is what determines the programs and services offered and how that organization will be managed. Cash-flow management is the process of projecting, monitoring, analyzing, and adjusting cash inflows, cash outflows, and cash balances (p. 53). It is very important to a nonprofit’s base budget to be either balanced or have some sort of surplus. If there is a surplus, then programs and services will need to be expanded/developed or used for some sort of capital investment that will help push the mission forward. On the other hand, if there is a shortage of funds, then the organization will most likely not be able to operate nor fulfill its mission. Cuts must be made until the cash flow balances out and the organization is no longer running a deficit.
There are a number of strategies available to a nonprofit organization that can be used to manage cash flow. These include: 1) arranging for a line of credit or loan from a bank; 2) speeding up the collection of receivables, to get liquidity from the organization’s own working capital; 3) holding a planned fundraising event or campaign earlier than originally scheduled; 4) financing the purchase of equipment by leasing it or paying for it over time; 5) liquidating investments; and 6) delaying payments to vendors (p. 61). It is strategies such as these which allow the CEO/executive director to make decisions/recommendations to the board of directors on how those monies should be used. More importantly, it supports the CEO/executive director in the decision making process. It is cash-flow that determine which programs or departments should receive a certain amount of funds.
What types of strategies do nonprofit organizations use to manage cash flow?
The type of strategies used to manage cash flow will depend on whether or not there is a shortage or surplus of funds. If a nonprofit organization is in or projects a cash shortage, then they may want to employ one or more of the following strategies: obtain a line of credit/loan for a bank, increase the collections of outstanding receivables, hold a funding raising event, leasing needed equipment, liquidating investments, and/or delaying payment to vendors. If a surplus of funding exists, then the organization may want to: expand its current programs, develop new programs, create a reserve via longer-term investments, and/or supporting community projects.
Monitoring of cash flow can be done with different reports. For example, a variance report provides a list of revenues and expenses to review what is going in/out. Another report is a cash-flow management report which displays how “liquid” the organization is and how much cash is available.
Great discussion Don. You have clearly outlined the three classes of funds utilized by nonprofit organizations. It has been through the reading of this chapter that I’ve learned more about permanently restricted funds which is common in nonprofits that receive funding to carry out specific services. For example, I’m currently working for a five year research study in the school district and the grant only covers educational materials but not any food expenses for the families. Permanently restricted funds also state what money can be used although, as you’ve mentioned, interest or dividends can be used for other purposes.
The explanation of the CSSA’s SIRF revenue made temporarily restricted funds more clear. As the book explains, the permanent restricted funds could come from a donor who would like the money used for something in particular. I am sure some of the donors for CSSA have donations of that kind. For example, maybe for a specific scholarship.