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The Cash Crunch!

Principles for Effective Cash Flow Management
Michael W. Lowstetter | posted 11/02/2007
This article provided by the Engstrom Institute

When I talk to other nonprofit managers about their financial problems, I hear statements like, "I break into a sweat almost every payroll Friday," or "It seems like money is leaving our organization quicker than it's coming in," and it causes me to think, they may have a cash flow problem. If these statements ring true for your organization or church, you might have a cash flow problem.

Three Steps for Effective Cash Management

Cash flow management is the process of predicting, tracking, and controlling both the cash coming into and going out of the organization over a set period of time. This definition highlights the three steps to effective cash management.

Predicting is simply putting together a cash flow budget that reflects your goals. Tracking is important in order to know if adjustments are needed. You'll need to track your actual performance throughout the period. Controlling your cash flow through active management is how you can influence the flow of cash. This is often the most difficult but most important step in addressing cash management concerns.

Predicting Cash Flow

In order to effectively manage your cash, set a goal for your organization. Cash flow budgets are an essential element in this process.

• Predict cash inflow. One of the most challenging parts of setting a cash flow budget is predicting cash inflows. Because of its difficulty, this is the best place to start. List all your income sources and evaluate each one to determine when they're usually collected. Using historical data, industry trends or program changes, calculate possible increases or decreases in cash inflows.
• Use historical data. Historical data is very helpful in predicting your cash needs for items such as supplies, travel and entertainment, postage and professional services. These are expenses that are incurred frequently, but not consistently. Historical data is also essential in helping predict the "ups and downs" of cash inflow. It's best to footnote your cash flow budget with as much source data as possible.
• Plan for big events. Organizations and churches can have "big events," impacting both inflow and outflow. Usually these events are easily predicted. If you're planning a golf outing, include this increased cash income, as well as the preceding cash outflow, in your cash budget. Be sure to plan for extra cash needs for capital expenditures, bonuses, etc., and include all predictable usages of cash.
• Align with budget. If your organization already produces an operations budget, use this document as a guideline for your cash flow budget. Alignment with your existing budget will help in projecting the amount of cash needed for salaries, benefits, utilities, insurance, debt repayment and other operating expenditures. If you use the accrual method of accounting, adjust line items such as accounts receivable and accrued contributions back to the cash method.

See also:

 budgeting, cash flow, cash management, Financial management