Share this content
non-profit cash flow management

How to Introduce Cash Flow Management to Non-Profits

Apr 1st 2019
Share this content

Accountants are often offered seats on local non-profits’ boards. If it’s a museum or big charity, your expertise might be directed towards overseeing their accounting firm. However, it’s more likely you are involved with a much smaller group run by well-meaning volunteers with limited business experience. In other words, they are great at spending money, but not at raising it.

In this scenario, the most value you can add may be in cash flow management. Do it well, and it may lead to adding new clients for your advisory services with some larger community groups.

Does This Sound Familiar?

You joined the board and were elected treasurer. An outside accounting firm does the required filing with government authorities. You don’t have any significant operations that sell goods requiring sales tax collection. The organization is funded by membership dues, donations and event-based fundraising. There’s a reserve tied up as an endowment and some restricted funds. 

The organization basically runs on cash flow, a concept not fully understood by your other board members. Their experience comes from running their own households, and their salary is directly deposited to their checking account. They pay bills, and if they run out of money, they write a home equity check. They consider revolving charge credit cards an extension of their salary.

What’s the Job of a Director?

In corporate America, the primary job of the board of directors is to protect the firm’s future (and survival) while representing the interests of shareholders and stakeholders. When a firm gets into trouble, the board and its members may face lawsuits for breach of fiduciary duty.

Things are usually informal in your local community, and non-profits often struggle to find board members and officers. Term limits are rare, and turnover can be high. They often muddle through. People see serving on the board as an honor, a way of giving back or generally volunteering. They usually don’t grasp the fiduciary nature of the job.

Enter Cash Flow Management

Bring the records home and work on this project on a rainy weekend. Using the last few years as a guide, tally the operating expenses by month. Use this data to produce a chart showing how money is cumulatively spent over the course of a year. For instance, if you spend $200,000 annually, you start at zero and end at $200,000. This is anything but a straight line.

Next, research the revenue booked on a monthly basis, and go back a few years. It might come from steady sources, like membership dues, along with spikes from events held or major one-time donations. You may receive foundation grants too. This should generate a line showing cumulative revenue growth, with its ups and downs.

Overlay the lines, combine the data and back out one-time events like bequests. You may find money is spent before it comes in. Worse, money is spent and the funds to replace it never come in. Show this analysis to the board. These charts should be simple to understand.

How to Solve the Current Problem

It’s highly unlikely your non-profit has a large credit line with the local bank. Rather, they likely have cash and investment assets aside as an endowment. The group probably votes to “invade the principal” when funds are short, with the justification, “We’ve always done it that way.”

Meet with the Executive Committee, the officers who primarily direct policy. Explain the organization need a series of events “here, here and here” that will bring in enough revenue to cover expenses. It costs money to raise money, but the net amount raised must hit or exceed a target.

You must build and nurture recurring revenue streams. For non-profits, this is usually annual membership dues. You need an active campaign to bring in new members and a parallel one to recover lapsed members. The second may be easier, but both membership focuses bring in immediate revenue.

You are meeting with the Executive Committee because you need their buy-in. Then, bring it before the full board.

Extraordinary Expenses

Nothing wrecks cash flow management like a big, unexpected bill. Companies often budget for capital improvements. Many Americans go the deferred maintenance route until a big problem happens. Then, they scramble. If these people are your fellow directors, your non-profit might function the same way.

To avoid this issue, create another expense, the capital improvement or reserve fund, and put money aside regularly as a cushion.

Cutting Expenses

Accountants are good at analyzing spending and cutting fat. There are likely several services your organization uses, such as insurance, trash collection, printing, communications, equipment rental, service contracts and fuel. It’s worthwhile to review these expenses and put them out for bid every year or two. At the very least, you’ll know if you’re getting competitive prices. As a member of a small board with a limited or no staff, it’s part of your fiduciary duty.

Can I Take This on the Road?

Getting this done will take a year or two. Be aware some board members running events may resent the accountability of hitting revenue numbers, while others may feel it’s too much like “work” and leave.

On the positive side, you will have put the organization on a sound footing, and word will get around. The phone should start ringing. People will want you to do this for their organization. They will likely want you to join their board and provide this service for free.

You can explain your passion has been the other organization, where you’ve been involved for years. Analyzing and implementing cash flow management for non-profits is part of your business. You can do an analysis, provide recommendations and conduct a board workshop. You can replace their current accounting firm that clearly isn’t providing this service. This costs money, but the results speak for themselves.   

Related Articles

How the Purchase-to-Donate Tax Strategy Benefits Clients

What Clients Should Know About Charitable Tax Donations

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.