When a nonprofit organization relies on donors and grants, forecasting cash with precision can fall outside out of your control. Grant decisions and payments can be delayed by several weeks, due to government shutdowns, economic factors and other unforeseen circumstances. Meanwhile, contributions from donors can be arbitrary, and influenced by outside things, like public sentiment, the economy and local events.
Even if you have a surplus on paper, the erratic nature of receivables can leave your organization with a temporary cash shortage. In the following, we’ll discuss how you can deploy strategies to maximize your inflows and stretch your outflows.
Build a reserve account
Creating an operating reserve is a smart move for any nonprofit organization. Instead of leaning on a line of credit to cover temporary shortfalls, available cash is the best way to make sure your expenses are covered until the next donation or grant installment lands in your account. Ideally, your organization can build enough savings to keep things going for 3 to 6 months. But if those reserves are at zero, start with smaller goals to build enough to cover, say, one payroll, then work your way up to two payrolls.
You can treat this reserve account as a revolving fund; as soon as receivables come in, replenish the savings, so the work continues in growing it.
To automate your savings goals, use a sweep account, which is a cash management tool available at your bank. This lets you set your main spending account to transfer a designated amount of excess funds from checking to savings, or a higher interest money market account. If your checking account falls below a specific balance, the sweep account can also send in a small portion of reserves to cover the temporary deficit.
Forecast early and often
Budgeting isn’t a one-and-done task at a nonprofit organization. Checking budgets and adjusting forecasts monthly can help your organization identify situations when inflows won’t meet your planned expenditures, and come up with the right response. One method is scenario planning, where you create several forecasts based on various situations. These can include events that have a negative effect on finances:
- The closure of a business that was a major donor
- A decrease in donations due to current events (such as the pandemic or an economic recession)
- An unexpected expense, such as a need for new equipment.
From there, come up with proactive solutions to fill in any deficits your forecasting uncovers. These plans can include listing well-monied donors to help with the backfill, or making changes to programing. Depending on your organization, other solutions might make sense.
It’s also useful to plan for positive financial events, so the organization is prepared to make good decisions with the windfall. Sketch these out on paper, think ahead and fill in the stakeholders with your recommendations. For example, you may see an influx of cash an an opportune time to start those office renovations, but others may have other thoughts and plans. Getting on the same page early can smooth out the process.
Optimize outflows and inflows
Getting control over inflows and outflows in the main operating account can go a long way toward keeping accounts in balance. With the help of cash management tools at your community bank, small adjustments in cash flow can reduce or even eliminate the gaps between outflows and payments.
Stretch your payments
Rather than mailing off the bills in one batch, a cash management tool, such as online bill payments, can help you achieve better cash flow. This would let you time your payments closer to the due date of the bill, so the accounts are less likely to register a deficit at any point during the billing cycle.
For 2021, make it a goal to automate at least half of your recurring donations — more, if possible. This can be accomplished with the help of a cash management tool that transfers funds directly from the donor’s bank account to the organization’s operating account. Automatic clearing house (ACH) lets you set up quick, secure payments, on the agreed-upon date that’s selected by the donor. With monthly ACH transfers, your organization will have a reliable funding stream that arrives on the same day.
Get the most out of your funding
Managing the finances of nonprofit organizations is a true challenge when out-of-synch inputs and outputs leave pockets of deficits in your accounts. To help you get the most out of your funding, meet with one of the helpful cash management specialists at Minnwest Bank and download our Cash Management Guide for Nonprofit Organizations. We offer the same lineup of cash management tools you’ll find at a larger bank, but with personalized service you’d expect at a community bank. Accomplish more in less time by talking to one of our helpful bankers today.