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Nonprofit Cash Management: Steps to Take Beyond the Annual Budget

Posted by Cary Giacalone on Tue, Oct 9, 2018

Business people looking at budget forecastManaging limited resources and dodging between various compliance issues, nonprofit organizations are at greater disadvantage than their for-profit counterparts.

One way they can take on this challenge is with the proper monitoring of cash flow. Nonprofit entities use two reports to this end – the annual budget and a cash forecast.

Where nonprofit financial statements are difficult to understand in the first place, walking the path between these two reports is a daunting challenge. Most organizations are familiar with the annual budget and take a considerable amount of time to create this report with the aid of its entire staff and approval of its board of directors. With such a time and talent investment each year, this document is clearly an excellent resource. Right?

A budget is prepared at the beginning of the year based on the best guess of how the year will go. However, one major change in the organization and this time consuming report becomes outdated.

Has your organization ever not received an expected donor’s gift? Receive an unexpected bequest or other new donation? Lost a key team member who it took several months to replace? Was the amount of your annual health insurance premium vastly different than your original estimates?

Each of these is one of many examples that will cause a well prepared budget to become outdated and ineffective just months into the year. While a board may elect to update its budget after such an occurrence, most do not. Instead they “set it and forget it.”

READ MORE: Nonprofit Financials: How to Best Explain Them to Your Board

Despite how common budgets are to nonprofit organizations, cash forecasts are just as uncommon. Though these reports can be far more useful, why are they so rare?

This is primarily due to the amount of time these reports may take to prepare. Whether you elect to prepare them on a monthly or quarterly basis, the overall approach can be seen as a mini-budget.

Since the annual budget often takes considerable time to prepare, finding time to re-create this process often doesn’t fall within our busy schedules. While this report shouldn’t take as much time as the budget, the value derived from it far exceeds any cost of preparation.

The greatest benefit an organization will see in using a cash flow forecast is that it is forward thinking rather than merely catching up with the past. As “forecast” is in the report’s title, the report is designed to look forward in time and considers where the organization is today and what its environment currently looks like.

The report will begin with your current cash position and then forecast the expected cash inflows and outflows. Nonprofits, like all businesses, have to adopt to changes in their environment and this report will allow you to do so and not fall victim to the outdated aspects of a budget discussed earlier.

READ MORE: 12 Ways to Take Your Nonprofit to the Next Level

That lost donor’s gift can be reflected by the intent to identify alternate funds or reductions in costs. That receipt of a bequest can be reflected as a plan to begin a new program or set up an endowment.

The increase in your payroll or benefit costs can be measured against cash inflows to determine how well the organization can weather that storm. Anyone who reviews the report can quickly see the benefits and use the information provided to determine the necessary course of action for the organization.

Another huge benefit of this report is that it can predict how long your remaining cash will last the organization. Any cash flow forecast reviewer can exclude projected inflows and gauge how many months’ worth of expenses will be covered by the current balances. Or a user can look at the bottom line of this report and see the ending cash balance at the end of the subsequent months.

Is the net cash balance growing or declining? Does the organization need to make plans now to avoid a catastrophic result? Is cash growing in such a way that the organization should be considering ways to expand its programming and reach a larger audience? Without a report that predicts future results, these kind of decisions are extremely hard to make.

As you begin preparing and using the cash flow forecast, you will find that your Board of Directors and other senior management has the information they need to properly drive your organization to success.

Concannon Miller has decades of experience providing accounting and audit services to nonprofit organizations. Our highly skilled advisors can provide valuable insight into protecting nonprofits from risks that could threaten their mission, recommendations on controls, and advice on basic accounting as well as providing efficient, courteous annual audit services. Contact us for more information.

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Topics: Nonprofit Organizations

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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