Navigating Cash Flow as a Nonprofit
Master the art of managing cash flow to ensure your nonprofit thrives and continues its mission without financial stress.
Understanding Cash Flow: The Lifeblood of Your Nonprofit
When you stepped into your role leading a nonprofit, you had high hopes of great impact and making the world better for others. More than likely, you weren’t thinking of how you would manage the inflow and outflow of cash to make sure the bills were paid and the mission kept running.
In other words, you weren’t dreaming of cash flow management when you became a nonprofit leader. But cash flow management is an essential task for every nonprofit, so we’re here to guide you through all you need to know.
Cash flow is the inflow and outflow of cash over a specified period of time. For a nonprofit, inflow includes donations, grants, membership fees, and earned revenue. Outflow includes all your expenses, from payroll to fundraising expenses and all your program costs.
You can have a positive cash flow, whereby there is more cash coming into the organization than going out of the organization; alternatively, you can have a negative cash flow, in which there is more cash leaving the organization than entering the organization. Through cash flow management, you can work to have your inflow exceed your outflow, ensuring that you can cover your expenses and continue operations without financial stress.
The Importance of Cash Flow Management for Nonprofits
Many nonprofits focus on revenue and how they are performing against their fundraising goals. However, cash flow also deserves your attention because it has more to do with the day-to-day operations. Slow fundraising months can leave you in a desperate position if you aren’t prepared for the seasonal dips. Even well-funded organizations can run into serious issues if cash flow isn’t managed properly.
Your organization’s sustainability and continuous impact depend on the availability of cash to cover your expenses. As a donor-supported organization, there is an ongoing need to demonstrate credibility to your stakeholders. Managing your cash flow can prevent pauses to program operations and minimize urgent giving requests, enhancing your credibility and long-term viability.
Decoding Cash Flow Statements: A Crucial Tool for Nonprofit Leaders
When it comes to managing cash flow, your starting point is a Cash Flow Statement. A Cash Flow Statement is a financial report that shows the movement of money in and out of an organization. Depending on the size of your nonprofit organization, there can be three key components: Operating Activities, Investing Activities, and Financing Activities.
Operating Activities summarize your cash received and expenses to help you know if there is enough cash generated from daily operations to sustain the organization. As with all financial reporting, ensure that your Cash Flow Statement is based on accurate and reliable data and is timely enough for you to make relevant decisions. Outdated reports can lead to ill-informed decisions, while timely reports can spare you a financial crisis.
Putting Your Cash Flow Statement to Work
You can use your cash flow statement to understand your nonprofit financial health. Start by analyzing the operating activities. Look at whether these activities generate enough cash to cover expenses. If not, consider these three paths (or a combination of them):
Decrease your costs - look for ways to cut costs without impacting your mission
Increase your fundraising efforts - explore new campaigns, sponsorship opportunities, or initiate new relationships
Accelerate future donations - encourage early gifts from donors
Beyond immediate cash flow concerns, your statement can help you spot trends that position your nonprofit for long-term financial stability. Comparing cash flow statements over different periods allows you to identify patterns and make informed decisions. By combining historical data with your budget, you can create a cash flow forecast—helping you determine the best timing for fundraising events, ensure adequate reserves for upcoming expenses, and decide when to launch new programs.
Proven Strategies for Effective Cash Flow Management
Forecasting cash flow is essential to effective financial management. This involves estimating incoming cash and estimating outgoing cash. A good rule of thumb is to be conservative on both the inflow and outflow: assume expenses will arise sooner than expected and that revenue may take longer to arrive. Regularly reviewing cash flow prevents surprises, allowing you to proactively address potential deficits and make strategic use of any surpluses.
Solid reporting and ongoing monitoring are crucial for managing cash flow. Consistent monitoring will prevent surprises and allow you to be proactive in heading off any deficits and making the most of your surpluses.
One of the most reliable ways to stabilize cash flow is through recurring revenue—whether from membership fees, monthly donations, or other predictable income streams. Unrestricted recurring revenue, in particular, can help bridge gaps during slower giving seasons. If your monthly donations can cover essential recurring expenses, you can allocate larger seasonal gifts or grants toward reserves, annual costs, or future growth initiatives.
The Gift of Cash Flow Management: Leading with Confidence
Perhaps the least talked about benefit of cash flow management is the gift of a non-anxious leader. The stress of a leader can quickly flow throughout an organization, hindering impact, performance, and even employee retention. When you are on top of your cash flow management and have forecasted and planned for the ebbs and flows that come with fundraising, you’ll be able to lead from a more confident position.
Commit to routinely engaging in studying your Cash Flow Statements and forecasting your anticipated inflow and outflow of cash to be prepared for the road ahead. Your team will feel the difference and be more apt to trust your leadership. The more informed and prepared you are, the more effective your team can be. Managing cash flow is part of the path that gets you there.
Final Thoughts
At its core, cash flow management is about control - ensuring your nonprofit has the financial flexibility to serve its mission without unnecessary stress. By leveraging your cash flow statement, forecasting effectively, and implementing smart financial strategies, you can transform cash flow from a challenge into a powerful tool for sustainability.
