In this article, I wanted to look at one particular aspect of managing a nonprofit – its cash flow. ‍

Cash flow: definition and role in nonprofits.

Cash flow can be described as the process of getting the cash receipts into and cash payments out of an organization’s accounts, with an emphasis on its timing. It is where the theoretical numbers on spreadsheets and reports move into the day-to-day reality of money changing hands.

Most nonprofit business models have two major components: what does an organization do (what kinds of products or services it provides) and how it gets the funding. Cash flow management has direct implications for both parts. Because the way the funds come in can be quite irregular in many cases (especially when there are many different sources of funding, such as a combination of grants from governments, private sector foundations, grassroots fundraising efforts, and individual donations), and spending is often unpredictable (disaster relief) it becomes even more important to understand how to approach cash management.

Understanding nonprofits’ cash flows

Cash flow management tasks itself largely with the understanding of when the funds come in and need to go out. To do it, we need to answer the question of what we do or how we spend our funds.

Though often nonprofits rely on volunteer work, the money still needs to be spent on paying for the work of managers, purchasing goods, paying the bills, etc.

We can make a distinction between the kinds of nonprofits, whose spending is quite regular (a research think-tank), fairly regular/seasonal (agricultural, educational), and irregular (disaster relief).

So cash flow management helps to understand the timing of cash needs — volumes and due dates of bills. If what you do can be predicted — your cash needs likely will be fairly systematic. If what you do is predictable but not consistent (seasonal needs, for example), you will need to plan for spikes and surges in your budget. If what you do is impossible to predict, you will always need to have some cash reserves to use them when necessary.

Nonprofits may also need cash at certain points for larger one-time expenses, for example, moving or purchasing a car or premises. And while a major investment like that would naturally be planned, sometimes a one-off but substantial expenses may come unpredicted, for example, repairs. So investment means having to release additional cash from your business account.

Why the purpose of the expenses is important

Apart from the availability of the money at crucial points (beginning of the month, season, mid-month), its volume is also very important. And you not only need to know how much you spent but also understand what for exactly the money was used. It’s critical for both your growth and proper functioning, as well as for maintaining healthy financial reports and strong relationships with your donors.

Give.org issued a report with pretty alarming statistics. It showed that only 19% of survey respondents “highly trust” nonprofit organizations, and the trust is in decline. 49% of respondents said that “do not trust (nonprofits) at all”.

In order to increase accountability and public trust, many nonprofit organizations have started to change their reporting by employing accounting software, which can help in achieving greater transparency. But to make the full use of the accounting software, integrations with third-party tools can play a significant role. Good example that I can briefly mention here can be using QuickBooks combined with Synder. This combination results in more transparent expenses categorization, which helps nonprofits to have clear reports available at hand and to more efficiently reconcile their financial records.

In a nutshell, Synder takes transaction data from online payment accounts of a company and brings it, – with every detail – into QuickBooks. The app does it automatically upon the initial setup, which is a true virtue for finance management, as it saves loads of time and ensures the highest level of accuracy.

As an illustration of how this can work for nonprofits, I want to use a testimonial, given by one those who successfully tried the QuickBooks-Synder combination.

Kepler College is a small non-profit corporation that provides online astrological education through free informative webinars, workshops and intensive courses. Our store sells our classes to students internationally using PayPal, Stripe and Square. For the past 20 years, we used the desktop version of PayPal because we initially had our central administration in the greater Seattle area. Since we are online, our Board of Trustees and administrators have increasingly been located all across the country. In 2019, it became clear we needed an online solution, and based on available options, we choose Quickbooks Online. It turned out to be a remarkably time consuming and frustrating process to go from the desktop to the online version. And it was made worse by Quickbooks support that appeared designed to service the inhabitants of Dante’s seventh level of hell. One critical area of this transition was, of course, getting a quick and accurate import from PayPal, Stripe and Square. I tried the Quickbooks option. Ouch! The Synder app, however, was perfect for our needs. Their documentation was clear. The process was easy to understand. The ability to roll-back transactions if you have questions deserves a Hallelujah.  And when I had questions, I got quick and accurate answers. It was a ray of sunshine in the middle of chaos. The app brought across the information we needed to turn reconciliations from a nightmare to just another job to take care of.

Funding

In order to understand how much cash you have available to spend, you need to be able to predict or build models that can give you an estimate of how much money you are going to receive.

Many sources of funding can be relatively predictable, given that large entities, such as governments and private corporations plan their budgets, which include contributions to nonprofits well in advance. Individual donations, however, require a complex way of management, and they are almost impossible to predict in advance. However, having a well-oiled machine in the way of understanding how much you need to spend, you can know when to increase your fund-raising efforts.

It also works the other way around: by being able to anticipate how much you can get funded, you can plan larger expenses, investments or hiring a new member of staff for a fitting time. Going back to individual donations, which is the largest source of charitable donations for nonprofit charitable organizations, according to the latest report by Giving USA, transparency is just as important here as in spending. Many nonprofits, however, do not receive a majority of their funding from individual donations. According to the National Center for Charitable Statistics, the so-called “earned income” provided almost half (47.5 percent) of the total revenue for public charities (501c3) in 2015. This can be anything from ticket sales, to tuition fees, to selling items.

Government contracts, another source of income apart from individual contributions and earned income, usually pay for services only after the services are delivered, forcing the service-providing nonprofit to cover the initial costs to deliver those services. This is quite typical of any business but is often compounded in the case of government funding by bureaucratic delays in processing invoices and payments. In the absence of other revenue streams or other ways of accessing cash, nonprofits in situations like this can face a true cash flow crisis.

Summary

If we can learn one thing from this analysis it’s that by looking at how a nonprofit is being funded, we can understand what to expect in terms of cash inflows. We can see whether “how we get funded” can line up with the “what we do” aspect of our business. Each type of funding has its challenges and very particular implications for nonprofits, so a business model built around one way of funding will need to base its spending on that particular way of funding, or rethink (if possible) their sources of funding, perhaps adding another one.

By matching the models of what the money is spent on and when, and how it is received, nonprofits can not only ensure their stable functioning, but also enhance their relationships with donors, providing for more transparency, accountability, and trustworthiness.

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