Cash Flow Wizardry for Small and Growing Nonprofits

The Peery Foundation is delighted to introduce Jane Leu as our first guest blogger. Jane is a serial social entrepreneur (Founder and CEO of Smarter Good) and a Peery Foundation Advisory Board member. 

By Jane Leu

If you are the Executive Director/CEO of a nonprofit, guaranteed this is a busy time of year. Likely you are deep in the throes of finishing your 2015 budget, and getting your board to approve it before everyone moves into full holiday mode. It is also a happy time of year because holiday gifts are coming in, as well as good news on grant application processes started much earlier in the year.  With your organization’s coffers filling up it seems a strange time to talk about cash flow issues, but please hear me out for a second.

First, let’s pause to conjure up the familiar feeling of cash flow problems. The 3am anxiety. Lying awake, running numbers in your head of money in and money out.  Obsessively checking your bank balance to determine if you can meet payroll this month. Doing terrible calculus of how soon you might need to let people go if that expected grant doesn’t hit. More than anything, there’s the feeling of no control, because as much as we work and plan, we really can’t predict with total accuracy if we’ll get a grant, in the amount requested, or even receive the check when the funder said we would get it. While total control is not possible, there are a few easy measures you can take now to prevent cash flow problems from causing sleepless nights in 2015.

1. “New Funding” needs names attached

When you did your budget, you likely looked at all the funding from this year, projected it forward with some modest increase and then tagged all the rest of the money you need as “New Funding”. It is so easy to get to the end of next year to discover that “New Funding” never happened because there was no prospective funder name attached to each of those dollars and a plan to cultivate them. And as a result, the cash didn’t materialize.  Before this year ends, I urge you to put a name of a viable prospect against each of those dollars. Then put three more names against each dollar because of the unpredictability of funding, even when there is a good strong program fit!

2. Calendar your Cash: Map decisions and checks against your 2015 budget

For each revenue source in your budget, attach a decision date. Then add at least six weeks to receive the check. For renewal grants and donations, take the few minutes to go back into your bookkeeping file to see when the check was received this year, and tag that month in 2015 with the expected funds.  Then remove 25% of those funds to account for funders that change their grant cycles, or put grantmaking on hold, or have turnover in their staff that delays a decision.  Now that you have a cash flow calendar you can see where you might have gaps.  I would suggest taking a hard look at QII, a quarter where almost every nonprofit I know has less inflow than the rest of the year.

3. Do a month by month budget

If cash looks tight at all, it’s worth the time to do a month by month budget. Small organizations tend to focus on an annual budget, but cash problems creep in when a new staff member joins and payroll costs go up or new program expenses kick in a month or two before a grant check arrives. Taking your annual budget and dividing by twelve evenly will not uncover these cash flow problem areas.

4. Negotiate now with current funders for a different decision date

Now that you know where you will have gaps, you can take steps to prevent it. You do have more control than you think. Let’s take an example. For your organization April, May, June (QII) looks dry as a bone. It’s common for nonprofits because year-end fundraising gets you through QI but few of the next year grant cycles will close before May or June. April in particular can be a hard month, especially because individual donors are feeling poor after tax day. Now is the time to go to your trusted and committed donors to ask if they would be willing to shift your organization to a QII gift. To approve your request, many foundations will need to move your organization to a different board meeting, and some funders have boards that only meet twice a year. When these shifts happen typically a funder will need to do an 18 month grant to cycle your organization to a new decision month. They will also need to plan on their side for a 50% bigger grant. That’s why you need to ask nicely NOW! Another idea is to ask your board members to give their annual gifts in the months in which you foresee the least cash coming in. As they say, you don’t get what you deserve, you get what you negotiate!

5. Involve Your Board

Boards really hate surprises. So the announcement at a board meeting that the organization is down to its last three weeks of cash never goes over that well. Conversely, rolling a discussion of cash flow into the annual budget process gives your board a great deal of advance notice and allows them to join you in problem-solving. It also opens up more options, such as getting a line of credit or changing payment terms with vendors to preserve cash. The earlier you involve your board, the better.

In summary, cash flow in nonprofit is unpredictable, that’s a fact. As Executive Directors, we can gain more control if we start to engage funders, donors and board members in the conversation about how that unpredictability affects our organizations and our ability to generate impact.  It’s worth finding the extra 3-4 hours during your annual budget process to zone in on cash flow and prepare for a cash-abundant and well-rested 2015.