By Stewart Darrell, CFA
Cash is the lifeblood of every organization, but for a nonprofit, this vital resource goes beyond the bottom-line. A lack of cash can interfere with an organization’s ability to achieve a social mission or deliver services to those in need. The weight of this responsibility falls to nonprofit leaders and boards and is challenging for many. According to a recent Nonprofit Finance Fund study, 62% of nonprofits surveyed stated that maintaining financial stability is a core challenge, yet 86% of this group also say that demand for services is on the rise.1 That’s a tough spot to be in, but fostering financial viability is possible with the right cash management strategy. Here are some ideas that we hope will spark new cash-enhancing approaches for your organization.
1. Creating Different Pools of Cash
Consider managing your cash across three separate pools for short-term, intermediate-term and long-term needs. The first pool can contain your “working capital” to house money needed for the ongoing operational and day-to-day costs, such as employee salaries, office expenses and the normal things needed to keep the lights on. Once you have your working-capital pool in line, focus on building up your “reserves” pool. This is often used to set aside money for future or unexpected expenses or costs that are further out on the horizon. View this as an essential rainy-day fund that can help tide your programs over during funding dry spells. After taking care of the short- and intermediate-term cash needs, it’s time to think about supporting the longevity of your organization financially. Hopefully, you have an investment strategy in place to manage your nonprofit’s assets, but if you don’t, your third pool of cash, “long-term,” can be used to put your organization’s dollars to work and grow over time. Creating an endowment for excess cash may also be an option. Don’t forget to institute a system for tracking and managing the different types of cash within each pool whether it be restricted, unrestricted or board-designated.
2. Smooth or Crunchy
In addition to using the pool or bucketing method above, it can be beneficial to look at your organization’s cash in a holistic manner to effectively monitor and balance cash inflows and outflows across categories. This approach can help you spot gaps and smooth out your cash flow. Most nonprofits tend to be seasonally- or cyclically-oriented but think about ways that you can make small adjustments to even out periods of cash crunches and surpluses. Consider adjusting your fundraising calendar, collecting installment donations in a way that helps bring in money throughout the year and time expenses appropriately.
3. Finding New Funding Opportunities
Cultivating reliable, tried-and-true funding resources is critical—no question—but, also ponder carving out time to explore new opportunities. Think creatively about how you might raise donations and discover new revenue-generating activities. Perhaps, your new board member has connections to a new group of supporters, or maybe additional grants have become available. The Foundation Center is an excellent resource for finding new funding. And as an added bonus—it also shares nonprofit best practices, socioeconomic research, and other valuable information.
4. Not All Dollars Are Created Equal
You know the saying, “don’t look a gift horse in the mouth”? Well, we want you to look the gift horse right in the mouth to see what you’re inviting in because not every grant or funding opportunity will be worth the cost of putting the dollars received to work. Determine early on if pursuing the new funding source makes sense for your organization and that you have the resources in-house to oversee and employ the new funding appropriately. The Fiscal Strength for Nonprofits organization offers a Funding Opportunity Assessment Tool that can help you evaluate new opportunities.
5. Congeniality Counts
Nurturing relationships inside and outside of your organization can be a revenue-generating activity in and of itself. Building brand equity, a positive culture, and loyalty in your employees and donors may pay dividends when you need them the most and motivate the group to carry the mission forward in good and bad times. Consistently remind them of why they should continue working with you and offering their time, expertise and support. Instituting a well-designed recognition program for employees and donors can be a worthwhile expense that may bring in more cash over the long run. Create a genuine sense of partnership at every touchpoint. This includes not only your donors and employees but also your vendors, insurance providers and banks. If your financial partners trust and enjoy doing business with you, it puts you in a better position to negotiate different payment schedules or access new resources such as a line of credit to keep cash flow running smoothly.
6. Inefficiency Is a Cash Killer
Unfortunately, the nonprofit sector has a reputation for inefficiency and poorly-run programs. According to a Chronicle of Philanthropy study, only 18% of donors surveyed believe that the charities they support run their programs and services well.2 Operational inefficiencies can mean not only lost donor support but also result in lost cash in the form of wasted time and resources. Take a step back and think about how your nonprofit operates and dig into the rationale behind your current approaches. Perhaps, there are ways you can save money over the long run by investing in new, time-saving technologies or discontinuing outdated processes.
7. Checks & Balances
Cash management is very much a function of risk management. As a nonprofit, you have a duty to manage your assets responsibly and report on your financial health regularly. Instituting clear checks and balances can improve efficiency, accuracy and prevent fraud while maximizing your resources. Appropriate internal controls can also help you demonstrate to your funding partners and supporters that you’re fulfilling your fiduciary duty.
We hope you enjoyed these cash-enhancing tips. Feel free to reach out to us if you’d like an objective review of your cash management approach and a fresh take on building best practices.