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Why your nonprofit needs a cash flow analysis

(Image: Chronis Yan)

When you understand cash flow timing, reporting, and forecasting, you gain supportive insights that, as a nonprofit leader, you need to make informed decisions and guide your nonprofit through shifting economic tides.

For instance:

Without an accurate understanding of historical metrics, the answers to these questions are really just a guess – making it nearly impossible to develop a forward-looking picture of your nonprofit’s strategy. But because community needs almost always exceed available resources, nonprofit leaders are often so focused on serving their clients, or on paying the bills that are immediately due, that they don’t pause to examine the big picture. 

It’s easy to overlook cash flow analysis in favor of more immediate demands, but there’s risk associated with omitting this crucial step: Your nonprofit organization could run into problems or missed opportunities, even when funds are flowing in at a healthy pace and everything seems to be going fine.

So: Besides the fact of money coming in and going out, what do the financial ebbs and flows reveal about your organization?

A cash flow analysis comprehensively “marries” the statement of activities with the statement of financial position or balance sheet, providing meaningful insights that identify opportunities and ways to close gaps. The timing impact of key financial resource shifts, both incoming and outgoing, can also be analyzed to determine how variances impact your ability to meet the mission. Even for a nonprofit organization, operating leverage can be tracked to determine the respective contribution (or cost) to your organization’s cash flow, and how the organization either “deploys” operating cash flow, or “accesses” external cash flow from lines of credit, investments, etc. can be evaluated.

The benefits are significant. Clarity around the real drivers of an organization’s resources and needs, and the ability to determine appropriate levels of liquidity, allows for optimal decisions around making investments in the mission or in a particular program, taking on new debt, or determining whether that attractive opportunity is truly a good idea right now.

Establishing tools and mechanisms to monitor your cash flow also helps you identify issues that could impact the long-term strategy, or even threaten long-term mission viability, while there’s still time to correct course. A few months of consistently negative cash flow might be a red flag that requires serious attention. A pattern of positive cash flow, on the other hand, can indicate you are on track to meet or exceed annual growth targets. 

However, this positive indicator may also imply that your capacity to meet future program demands could be a challenge sooner than you anticipated, leading you to revise your long-term mission strategy to propel growth. Many nonprofits experience seasonal ebb and flow, and monitoring cash flow over time will reveal that pattern. If the numbers don’t appear seasonal – if you’re in the black year-round – you might want to investigate strategies to make better use of the extra cash you’re generating, once you’ve stashed away an adequate cushion for slower times and mission-related emergencies. Assessing the level of “adequate” liquidity cushion is also an important strategy to define, develop, implement, and monitor.

A successful nonprofit doesn’t only serve its clients well, but its stakeholders too, so that it can continue to grow and thrive for years to come. Careful attention to short- and long-term cash flow, and the underlying implications, lets you understand how much cash flow your nonprofit needs over time, create projections and forecasts so you know what to expect, and make the best decisions possible as you work toward long-term million fulfillment.

To learn more about how cash flow analysis and forecasting can benefit your nonprofit, contact Chris Fields of the Client Accounting and Advisory team at Mauldin & Jenkins.

Chris Fields is a director at Mauldin & Jenkins and leader of the firm's MJ Nonprofit Adivisors initiative.

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