Nonprofit organizations are experts in getting a lot done with limited resources. However, when cash shortfalls arise, nonprofits can find themselves walking along the edge of a very high cliff, with disaster just a misstep away. This article describes several options that nonprofits can adopt to back away from the Cash Flow Cliff.
Liquidity
This is a finance term basically referring to the ease and quickness of converting an asset into cash. Liquidity also describes an organizations ability to access funds to continue operations.
New accounting rules require nonprofits to disclose liquidity within their financial statement footnotes. This is very important as these disclosures provide insight into an organization’s preparedness to deal with unexpected issues and its capacity for good planning practices.
It is also important because nonprofit financial statements continue to experience greater scrutiny, due to data aggregators and nonprofit rating organizations. As a result, donors have access to this information and may use it when making contribution decisions.
Ways to Step Back
Funding Source Diversity
Nonprofits that have only one or two sources of funding are at higher risk of experiencing a cash flow disruption. It may be short-term, such as a government funding issue or long term if the program you rely on has its funding cut.
Work with your development folks to grow funding from as many sources as possible, including federal, state, individuals, foundations, DAF and earned income.
For more detail on Revenue Diversity, check out this article Revenue Diversity: Ensuring Reliable Funding for Long Term Viability
Cash Reserves
One of the biggest nonprofit myths is that organizations cannot earn income above their costs. This is an issue with using the term nonprofit, as it suggests no profit.
Depending on your funding source, you can obtain funds to set aside for an emergency or to reinvest in the nonprofit. Unrestricted cash donations can be held in reserve, as well as, earned income in excess of costs. Develop programs that include reserve contributions in pricing. While many federal and state grants limit these funds, some programs do not.
Borrowing
Another component of liquidity is the organization’s ability to borrow against the assets it cannot immediately convert into cash. Many banks provide lines of credit, which are low-cost instruments that allow an organization to borrow cash with short notice. This is a tool best used for short-term requirements.
Cash Flow Management
It amazes me how many nonprofits sign purchase or service agreements with “due immediate” terms, when they are lucky if they can get money in from funders in 30-60 days. The difference between how fast you pay your bills and how fast you collect on your invoices is a metric that every organization should monitor and manage.
Negotiate with vendors or service providers to extend terms, especially in those cases where they do not provide nonprofit discounts. At the same time, look for ways to accelerate billing and collections. Always encourage funders to provide electronic payments and if you receive checks, consider a lockbox service. These services deposit funds immediately and send you a scan of the check and backup.
Earned Income
Take a service provided to a client or program and offer it as a commercial product or service to other businesses and gain a cash profit.
If the service you provide is not related to your mission, then you may have unrelated business income. In those situations, the income in excess of costs is taxable, but the organization retains the after-tax amount to use as needed for reserves or reinvestment.
Bottom Line
New nonprofit accounting rules put a spotlight on organizations’ liquidity position and should motivate nonprofits to ensure they have reserve funds or available financing arrangements. With these in place, the nonprofit is far more likely to weather a funding crisis. Nonprofits need to explore diversified funding sources, build cash reserves and establish financing arrangements. In addition, they should practice good cash flow management and consider earned income projects. By starting to address liquidity now, nonprofits can step back from the Cash Flow Cliff.
What techniques does your nonprofit use to avoid cash flow issues? Please share your experiences in the comments section.
If you are interested in learning more about nonprofit leadership topics, then check out the nonprofit leadership blog: Not for Profit Beyond the Numbers
If you have questions or would like a consultation on a nonprofit leadership issue, contact me at: mfcade@nfpbeyondthenumbers.com
For more about the author, follow this link: Michael F. Cade, CPA, CGMA
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