Improve cash management to control budget deficits

In an economic downturn, when most nonprofits simultaneously face revenue losses and the growing needs of their constituencies, it would be wonderful to find a simple and painless way to improve cash flow. However, there’s no easy solution to the cash crunch.

Hard work and a steadfast focus on your mission are essential. And to make it all work, you need to evaluate your operations for potential expense-cutting, bring in revenue in a timely manner and develop a simple cash flow forecast.

Getting the cash in the door

The first step toward good cash management is reviewing the sources of your funds. If your nonprofit collects fees for services, you’ll want to be even more attentive to accounts receivable than you would in healthier economic scenarios. For example, if your payment terms are “30 days after the receipt of service,” consider contacting your clients on day 31 or soon thereafter.

For clients with a history of paying late, you might work out a payment plan before providing the service. Don’t view this measure as harsh — if you’re sensitive to your members’, students’ or clients’ financial challenges by offering payment terms, they may be more apt to continue to use your services. This is especially true if they can find less costly options in the marketplace.

If much of your revenue comes from foundation grants, you’ll need to make sure that your grant-supported programming ties to your primary mission. If not, refocus it there. Many foundations with dramatic asset-value losses have cut back, or eliminated, grant making this fiscal year. Funders continuing to support charitable efforts want to make sure that their money goes to the population with the greatest need.

Particularly if your services target hunger, the homeless, employment opportunity or housing issues, you need to show how your program and your mission fulfill a greater community need. Use newsletters, your Web site, meetings and events to communicate specific cases — show how your organization has directly affected the lives of people in your community.

Other sources

After all of your regular avenues for cash have been exhausted, you’ll need to turn to other sources. Your cash reserves, or the investments your board has designated for future use, offer other ways to support your operations, and the time to use them may be now.

For example, if you have an endowment that was initially restricted by the donor to be maintained “in perpetuity,” you have no legal right to spend the amount of that gift — unless the donor removes the restriction. But if your endowment was designated for a certain purpose by your board, the board may change that desig-nation and release the funds to support current programming.
Watching your expenses

The continued flow of revenue into your not-for-profit organization is important, but don’t neglect the flow of cash leaving for operating expenses. Scrutinize areas of potential cost-cutting that won’t affect services to your community. Look first at your largest expenses where change will have the greatest effect on cash flow:

Rent or lease expense. Try to negotiate a lower monthly rent, a rent holiday or even a change in payment timing that works better with your income stream.

Travel costs. Compare the costs of different airlines and hotel chains. Evaluate whether a video conference or phone conference might be able to take the place of a face-to-face meeting. If you currently pay for a phone conference service, explore free web-based options.

Payroll. Closely analyze your staff members. While it might be difficult to let employees go, your organization’s health may depend on it. Look for the employees who aren’t holding their own or are less utilized than others. Determine if any of your organization’s processes could be improved to increase productivity. For example, by analyzing the addresses of a home health care worker’s patient assignments, you may be able to reduce travel time while adding units of service provided. If all employees are irreplaceable, consider asking the full staff to cut back their hours or take one or two unpaid days off per month.

Supplies. By comparing costs, joining a buying club or contracting with your supplier, you may be able to reduce the cash you need for supplies. Your suppliers also may be willing to contribute a percentage of your annual purchases as an in-kind donation to your cause. It doesn’t hurt to ask.

Surviving the drought

Strong cash management tools are important for short-term decision making, and they’ll help your nonprofit control budget deficits and survive to accomplish its long-term goals. The investment that your organization makes in this process is likely to be paid back many times over the next several years. •

Your cash flow forecasting model

Developing a forecasting model to monitor your cash flow is as important as your decisions to cut costs or negotiate payments. A model based on your monthly operating budget is a good starting point. Follow these three steps:

1. Use a spreadsheet to view your annual budget by month, including beginning and ending cash.

2. As actual financial results become available, replace that month’s budget with the actual results, which will change your future cash needs.

3. Enter into the spreadsheet model any changes to the budget based on current decisions.