Cashflow is the movement of money into and out of an organisation, and is like the blood flow through the organisation.
Managing cashflow is one of the most under-estimated financial management performance tools, and yet the failure to manage cashflow is a primary cause of bankruptcy, whether it's a nonprofit or commercial organisation. When small businesses fail - even when they have a great product or are are making a profit - it is because they have not retained enough cash to meet their debts as and when they fall due. A great profit or surplus might all be in invoices which have not yet been paid, while the rent, salaries and other debts cannot be delayed.
Once the immediate debts begin to mount, without adequate cash in the bank to meet them, there is a death spiral scenario. Creditors start to get anxious when they their invoices are being delayed, especially beyond the terms of payment.
They might reduce credit terms, or even insist on cash on delivery. As more and more creditors’ claim payment, they can start a stampede, as well as impose penalties for late payment, exacerbating the cash shortfall.
Nonprofits are not immune from cashflow crises, although the past practice of government funders and grantmakers making payments in advance had been a godsend, so that there has been a surfeit of cash at the outset of a financial year or a project. Those days are numbered, partly because funders now want to benefit themselves from a much slower release of cash. By drip-feeding grants, the funder is able to take up advantages of (even small) interest earnings, or funding their own cashflow needs.
And in respect of aged care services, the NDIS and child care - where increasing proportion of the revenue is being paid by service users - then service providers have effectively become debt collectors to ensure all the fees are recovered, and as quickly as possible.
Here are some practices to limit the risk of the cashflow death spiral.
At AFG workshops on this topic, we emphasise the value of financial reports to keep nonprofits informed, and that the information must be such that it leads to decisions. Information without decisions are nearly as bad as decisions without information. The income and expenditure report to budget, and the balance sheet, are compulsory, but what is often left out is the statement of cashflows. [This is not the statement which appears in the audit but rather is a month-by-month estimate of cash at bank into the future.] The cashflow forecast doesn't stop the crisis, but can tell you when it is going to hit… What month the cheques are likely to bounce, the salaries won’t be paid, and the rent payment is returned! Instead of pulling the doona up higher, the cashflow forecast will lead the management to do something.
There are software applications which can build cashflow forecasts, but much of the science of this report comes from the art of predicting cash inflows and outflows. We have loaded a simple sample Excel report in Resources, to see the way a report works… and then build from there.
While borrowing has not been an option in the past for nonprofits, there is an increasing use of lines of credit to fund cashflow in the sector. In some cases, organisations use credit cards to ‘buy’ 55 free days in order to defer payment by more than a month which can be a significant shift in favour of the organisation. (The trick is not to exceed the ‘free’ days, because even a small interest charge may offset any benefit). Banks are also approachable for overdrafts and lines of credit from nonprofits, especially where there are assets to hold as security. Shopping around and talking to banks, credit unions, and other providers can be beneficial for terms, especially if the approaches are made well in advance. Organisations with a sudden and unforeseen cashflow issue are going to be in less of a negotiating position around terms, amounts needed, etc.
Collecting outstanding debts
There is an adage that to be successful, keep your debtors close and your creditors remote. Pushing back on paying bills (without incurring debts, penalties or the wrath of the creditor) while ‘hoovering’ up as much of the money due as possible, as quickly as possible - is the key.
Offering a discount for early payment can be an incentive to bring cash in.
The longer invoices owed remain unpaid, the more difficult to collect them, and the risk of having to write off debts can be very harmful.
Software such as Debtor Daddy can be very helpful, as well as considering payment by direct debit for recurring invoices, or accepting credit card payments directly or via gateways. Where there are costs of collecting debts weigh these up, but in times of tight cashflow, efficient debt collection can keep the organisation alive.
Nonprofits are usually scrupulous when it comes to managing expenses, but there is no harm in trying to make even small reductions in costs. Outsourcing administration and financial functions can make a big impact on salary costs, which can be up to 80% of the organisations’ payroll. The organisation may tolerate outsourcing in non-mission areas in order to reduce outflows, or at least plan them over time.
Matching expenses to budgeted revenue is a critical activity, especially in times of reducing grants. Non Profit organisations are at significant risk if they don't time the termination of staff and winding down of program costs to coincide with the end of the funding. Even leaving the costs in place without corresponding income can cause leakage of thousands of dollars, which are unrecoverable.
Garage sales and ebay
Where an organisation has acquired computers, and other assets over time, and these are redundant to current needs, there is a tendency to let them languish further and then trash them or give them away. Moving as early as possible to sell them and realise the cash can make a difference, and also promotes a culture in the organisation that assets are valuable, even after time.
Use information to make decisions about cash inflows and outflows, and then press on consistently and with purpose can mean the difference between a successful organisation and liquidation.