Projecting with Cash Flow Management

Posted by Scott Sipple, CPA

Calvin CoolidgeCalvin Coolidge, the 30th President of the United States, once said, “The business of America is business.”  He served as the country’s leader for two terms, which ended just a few months before the stock market crash of 1929. His political philosophy suited all the business interests that wanted to control their own destiny since the Post World War I economic conditions were favorable and prosperous.

Nowadays, the economy has exhibited some characteristics of the Great Depression. Many business leaders, especially those in the nonprofit industry, fret about having enough money to meet their organizations’ financial obligations each month. But those who effectively monitor cash flow can successfully predict when they’ll have a surplus or shortage. They can develop better expectations of future events to determine the current and long-term needs of the organization.

The most effective planning strategy for an organization to implement is cash flow management which involves analyzing cash inflows and outflows based on the timing of receipts and payments.  Most nonprofit organizations formulate and implement an annual financial budget. Cash flow management expands the scope of the budgeting process by identifying when sources of funds become available and uses of funds are necessary. For example, a nonprofit organization holds an annual fundraising event including dinner and a show in May. Attendees buy tickets for the event and goods and services are procured in April and May. The estimated receipts and disbursements should be recorded in April and May on the cash flow management matrix. Other activities can vary significantly from month to month for a variety of reasons.

To begin managing your nonprofit’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.” It is a time-based report; simply averaging expenses and income over 12 months would yield the least effective result. The grid compiles the following information into four categories:

Beginning Balance. Enter the amount of available cash at the start of the month, which should equal the ending balance per books on the operating and/or payroll bank account reconciliations.

Cash Receipts. Create line item entries for revenue, proceeds from sales of assets and/or debt instruments (such as loans or line of credit withdrawals) you’ll have for each specific month. Total all the individual entries to calculate the amount of cash inflow.

Cash Disbursements. Make line item entries for expenses, purchases of assets, and/or payments of debt instruments. Total all individual entries to calculate the amount of cash outflow.

Ending Balance. Add the beginning balance to the net inflow/outflow number to get an idea of your cash position for each month. Use historical data in addition to what’s on your calendar for the year ahead to help create your projections.

To complete your budgeted cash flow management report, compile a total of your cash on hand and estimates of cash receipts and their expected arrival 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 services fees, occupancy charges (including rent, utilities, and insurance), and office charges (including telephone service, equipment rental, service contracts and supplies). Last, be sure to include financing costs and all other expense categories (including travel, postage and printing). It is important to be as realistic as possible when the organization expects to receive cash. If you’re executing a fundraising campaign, donations can come in months after your initial mailings. Reflect that in your projections.

As the Treasurer of a nonprofit organization, I have witnessed firsthand how a finance department uses this management tool to its fullest capability. Over time, the ability to successfully project and manage cash flows and positions — along with effectively managing the budget and having sufficient liquidity — is paramount to your organization’s viability.

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