If your organization is among the many nonprofits dealing with uncertainty about their financial futures, it’s perhaps more important than ever to have a firm grasp on your cash flow. Poor management of the money coming into and going out of your organization could leave you struggling to support daily operations. Fortunately, there are steps you can take to reduce the odds of coming up short when paying your obligations, from program expenses to payroll.
1. Monitor the right numbers
While financial statements such as activities and financial position are important snapshots of a nonprofit’s overall financial health, the statement of cash flows provides critical information on your current liquidity and potential cash crunches. It shows the sources of cash inflows (for example, donations, grants and program fees) and outflows (wages, rent, utilities and program-specific expenses), along with the net change, broken down by operating, investing and financing activities.
Your nonprofit should also make cash flow projections. In turbulent times, it’s wise to perform rolling 12-month projections of inflows and outflows. As each month of the year ends, add another month to the end of the forecast. For example, when October 2025 ends, October 2026 is added.
Make sure you’re realistic and use the actual expected timing of cash flows. If you simply divide budgeted amounts by 12, you won’t be able to identify looming cash shortages. And consider any relevant restrictions on funds, such as government grants with strict compliance rules, corporate sponsor grants with targeted initiatives and restricted gifts.
2. Emphasize recurring revenue
Recurring revenue (for example, annual memberships and subscriptions) provides valuable peace of mind and can facilitate better planning. To boost such revenue, allow one-time payments to be broken into monthly amounts.
Annual contributions can also be paid in installments, which may lead to funding increases. Some organizations have successfully raised donations by asking donors to “drop a zero” on their intended one-time donation amount and give that smaller amount every month. For example, a donor who planned to give $5,000 at the end of the year would provide $500 every month, for an annual total of $6,000.
3. Re-negotiate regular bills
Contracts aren’t always written in stone, and you shouldn’t assume you’re getting the best deal from your vendors and suppliers. When times are tight — and even when they’re not — it can pay off to ask if they’re open to changing your arrangement. Pricing shouldn’t be the only focus. If vendors won’t budge on price, they might agree to longer payment terms, fixed fees or a volume discount for consolidating multiple services with a single provider.
Do your homework first, though. If you can find other vendors that offer more favorable pricing, you can negotiate from a stronger position. You’ll also likely have the upper hand if you attempt to negotiate as your contract or lease ends.
4. Diversify your revenue streams
Nonprofits that are overly reliant on a specific revenue source can find themselves scrambling if that source unexpectedly dries up. You might lose a large grant, a recession could depress individual donations or government funding might evaporate. If you have additional revenue streams, you can minimize the disruption to your cash flow while you search for ways to fill the gap.
Service fees or product sales are one option that can generate additional revenue. You might, for example, charge a fee for services you already provide. If you provide tutoring for low-income students, you might want to charge students who aren’t economically disadvantaged for the same service. You could also offer fee-based lectures or seminars related to your mission.
Keep cash king
Cash flow management is an ongoing process. Review your cash flow statements and update your projections regularly so you don’t jeopardize your organization’s future. Reach out to Hood & Strong to put a solid cash flow plan in place.
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Sidebar: Don’t Fall Into the “Overhead Starvation Cycle”
Effective cash flow management is often complex for organizations caught up in the “overhead starvation cycle.” The Nonprofit and Voluntary Sector Quarterly describes this as a “self-reinforcing feedback loop” that results from unrealistic donor expectations, competitive pressures and misleading reporting.
The cycle is typically triggered by long-held donor beliefs that lower overhead is always preferable because overhead spending diverts money from programs. (There isn’t much credible evidence to support this position.) Donors’ beliefs might pressure nonprofits to cut and underreport their overhead expenses to appear “lean.” The cycle slowly but steadily starves nonprofits of necessary funds. It leads to consistent underinvestment in staff skills and training, financial and IT systems, and other expenses vital to accomplishing their missions.
But transparency and donor education can help break the cycle. Explain to donors the role overhead plays in achieving desired outcomes and empowering the organization and its programs.
