Cash Flow Finance
No matter how expertly you manage your budget, you can confidently project a surplus at the end of the year and still not have enough cash at some point during your fiscal year.
That’s because money doesn’t always come in and go out smoothly from day to day or month to month. In order to weather the ups and downs properly or, more importantly, so you don’t end up in hot water, it’s important to project and plan your cash flow.
Let’s explore that, shall we? First, it’s important to understand the difference between your cash flow and your budget. Know that they are both critical to understanding your overall financial picture. Your budget is a plan for how you will earn money and spend money. Your cash flow is a record of when money comes in to and goes out of your organization. In order to have cash when you need it, you’ll need to create a cash flow projection system that works for you.
Planning a cash flow is different from budgeting in a few key ways. Cash flow does not relate to calendar or fiscal years. And just because you have a cash shortfall at some point during the year doesn’t necessarily mean your budget is in trouble. Your cash flow projection does not include non-cash income and expenses such as in-kind contributions or depreciation.
Most importantly, cash flow does include all the money that comes in and out, including transfers, loan payments, and sales of investments. Cash flow planning begins with a realistic budget. It’s important to understand what types of income you have, when income will come in, and when expenses will be paid.
And you’ll need to make accurate assumptions about your cash flow over the course of the year. Plan for things such as seasonal needs, payroll, benefit plan payments, discretionary repairs, capital purchases, or for the timing of when grants or contracts will be received. Then be prepared for cash shortfalls, those times of the month or year when cash isn’t coming in, but the bills are. And monitor and respond to cash shortfalls in a timely manner.
If you find yourself with a cash shortfall on the horizon, here are a few tips. Consider if you have the ability to bring money into your organization faster. One way to do this is to build relationships with foundation program officers, major donors, and contract managers and ask if payments can be made earlier in the year. You might also consider changing the time of your annual campaign or special events. And review invoicing and collections practices to see if you can bring in money faster.
Another tip is to send out money slower. To do this, consider the timing of payroll and benefit plan payments ahead of time. Discuss payment options with service providers and negotiate installment payments or request longer payment terms. Plan the timing of discretionary repairs or capital purchases for the year.
And, find other sources of cash such as a line of credit or use your reserves as an internal line of credit. By planning, preparing, responding, and understanding cash flow you can ensure the financial health for your organization 365 days a year