Cash-Flow Forecasting: An Introduction for Nonprofit Leaders

Many a wise entrepreneur has learned that “cash is king” — and the same principle applies to nonprofit leaders. The phrase alludes to the often-contradictory responsibility of financial managers, who must keep their organizations in the black in the long term but also must ensure there’s always enough cash on hand to pay the bills and stay in business.

In the nonprofit sector, financial managers must often invest excess assets to help ensure money is available for continuing operations and future projects. Invested wisely, those assets will grow apace. Some of a nonprofit’s assets must be kept in ready cash because income and payouts are often out of sync, which can lead to a cash shortfall.

If cash flow becomes a problem, bills can go unpaid and projects can whither, ultimately placing a nonprofit’s sustainability in peril. Cash shortfalls can force nonprofit leaders to make painful decisions like juggling payments to creditors. Even a short cash crunch can threaten a nonprofit’s credit rating, which is why savvy financial leaders create cash-flow projections.

No matter which leadership job you hold in a nonprofit, it’s helpful to understand the basics of cash-flow forecasting. Here’s a quick overview:

Getting started with cash-flow forecasts

As defined by the primer “Nonprofit Kit for Dummies,” a cash-flow projection estimates not only how much money you’ll receive and spend over the course of a year but also when you’ll receive and spend those funds. The forecast breaks down your annual budget into chunks of time — preferably monthly, say authors Stan Hutton and Frances Phillips.

Formulating a cash-flow forecast starts with three key steps:

  1. Establish a time frame, preferably the prior three months.
  2. List all of the organization’s income and payments.
  3. Break these totals down by month.

These numbers provide a blueprint for month-by-month cash flow needs in the future.

Accounting for variable vs. fixed expenses

A cash-flow forecast has to account for fixed and variable expenses. Fixed expenses like rent remain much the same every month. Variable costs like utilities in seasonal climates change every month.

Certain expenses occur only at certain times of the year. If you own your own building, for instance, your property taxes might be paid quarterly, semiannually or annually. The same principle might apply to insurance premiums.

A cash-flow forecast must account for when these different items need to be paid. To keep forecasts up to date, it’s essential to subtract total expenses from income every month. Any surplus at the end of each month becomes the starting balance in each month that follows.

Comparing projected vs. actual cash flow

If it falls to you to make cash-flow forecasts, you can begin modestly by tackling projections spanning three months at a time. As you become more expert at making projections, you’ll be able to create a roadmap for an entire year.

An important element to incorporate into your projections is to track your projections against actual cash flow every month. This will help you to refine your skill in planning and forecasting cash needs further into the future.

Finding ways to improve cash flow

As you chart your cash needs, be sure you engage in some basic rethinking of your organization’s income practices. In particular, cash-flow forecasting provides a great opportunity for nonprofit managers to identify additional sources of income.

Be sure to investigate new sources for grants from donations and reach out to new potential donors. Another tactic is to use low-risk financial instruments, such as laddered certificates of deposit, to generate ongoing interest income (“laddering” uses CDs with staggered maturity dates and multiple interest rates).

Laddering ensures regular interest income and helps to create a modest investment nest egg for your organization.

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