Cash flow is what makes the world of business — and nonprofit organizations — go round. Ensuring that your organization has adequate cash on hand to meet its operating expenses requires cash management skills and accurate cash flow reports.

The ups and downs of cash

Cash flow management involves analyzing cash inflows and outflows based on the timing of receipts and payments. It’s more than taking your annual budget figures and dividing by 12 to come up with a static, monthly amount — this won’t give you an accurate snapshot of your cash flow. Consider an annual event. If it’s a spring gala, costs rise in April and May as you plan, and pay for, the event.

Costs also may bump up noticeably in, say, December if you publish an annual report then. In fact, costs can vary significantly from month to month for a variety of reasons — for example, as staffing needs change and heating and cooling costs rise and fall.

Similarly, your influx of cash might vary dramatically throughout the year. For example, donations typically spike around the time of fundraising events and also at the end of the year, when donors are trying to get last-minute tax deductions. The timing of grant payments also can lead to significant income fluctuations from month to month.

Simple grid work

To begin managing your not-for-profit’s cash flow, create a cash flow report using a simple grid. Along the top, list all 12 months and label them either “actual” or “projected.” Going down the page, create rows for the following information:

•  Beginning balance — this line shows the amount of cash you had at the start of the month.
• Cash coming in — line item entries display the largest income categories you’ll have for each specific month; add up the individual entries to calculate your nonprofit’s amount of incoming cash.
• Cash going out — make line item entries for the largest categories of expenses, combining as necessary, and total all individual entries to calculate the amount of outgoing cash.
• Net inflow or outflow — subtract your cash going out from your cash coming in to determine your net inflow or outflow.
• Ending balance — add the beginning balance to the net inflow or outflow number to give you an idea of your cash position at the end of each month.

Use historical data in addition to what’s on your calendar for at least the next six months to create your projections. Remember, you’re creating a time-based report, not simply averaging expenses and income over 12 months.

Be realistic about when cash will actually come in. If your big fundraiser is cash-based, you’ll have the money in the month of the event. But if you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections.

Final touches

To complete your cash flow report, compile a total of your cash on hand and estimates of cash receipts and their due dates. You’ll also need to enter into the report payment amounts and schedules for personnel expenses including salaries, wage increases, taxes and benefits.

Other data you’ll need includes consulting and professional service fees, occupancy charges (for instance, rent and insurance), and office charges (such as telephone service, equipment rental, service contracts and supplies). Last, be sure to include debt payments, financing costs and all other expense categories (for example, travel, postage and printing).

Uses for your report

Now that you’ve made the effort to collect information for your not-for-profit’s cash flow report, you’ll want to use that data to your organization’s advantage. With your projected cash flow for the year in front of you, you can now make better decisions about how and when to spend money, when new sources of cash are needed (for instance, from contributions or a temporary draw on a line of credit), and how much of the surplus you can invest and for what period of time.

You also must evaluate your organization’s excess revenue over expenses on an accrual basis to determine if the costs of certain activities are justifiable. Cash is important but, before spending any “excess,” evaluate your nonprofit’s full financial picture.

Thinking ahead

Cash flow reports will help you make sure that your organization always has adequate cash to meet its financial commitments. Holbrook & Manter can assist with this process. Contact us today to get started.