Top 4 Tips For Effective Nonprofit Cash Flow Management

When you hear “cash flow,” what do you think of?  Is it the amount of money available in your bank account?  Yes.  But so much more.  It includes the composition – where are those funds coming from? What are your income sources? And what are you spending it on? A good accounting software serves as a critical function in cash flow management!  

Here’s four tips for managing your cash flow effectively!

1. Timing.  It's unlikely that your income or your expenses are linear.  They do not happen in equal amounts each month.  For example, if your nonprofit receives a significant amount of support from individual’s contributions, your income may be concentrated in December.  If your fiscal year runs from January through December, all year you will look at your financial reports and hold back spending because you’re concerned about the budget.  A non-linear budget will help you manage those cash flow challenges – measuring actual results to the planned amount each month instead of 1/12 of an amount that happens in December.  Bonus tip: You may also consider a change to your fiscal year off a calendar year cycle. 
2. Restricted funds.  Spend donor restricted funds first.  For example, a donor earmarks their gift for a ministry outreach that you do each year and have budgeted for.   Be sure to spend the donor restricted funds first.  You can do this by “releasing” those restrictions.  Or by receiving the gift into unrestricted giving when you can demonstrate that the restriction is fulfilled in the fiscal year it was received. 
3. Operating reserves.  Lean times come.  The unexpected happens.  Cash flow becomes hard during those times – making it a best practice to have 3-6 months of reserves.  If you’re reading this and you do not have an emergency fund for your nonprofit, start today!  Maybe start with the goal of saving 1 month in reserves this year.  Do the same next year and you’ll have your operating reserves established within a few years. 
4. Money on mission.  How often do you do an intentional review to cash flow to make sure that our money is fulfilling your mission?  It starts with good financial reports that let you measure your cost by program.  Taking it to the next level – measure the return on your investment.  This moves you from measuring what you spent on a program to assessing if the results are in line with our mission? This is hard work. It requires an incredible amount of unbiased evaluation.  Use this ROI analysis to determine if you need to reallocate funds, change the approach, or even cut something that's not performing.

Stewarding well all that you’ve been entrusted with takes active management of cash flow.  I hope these tips help you effectively manage your nonprofits mission and accomplish what you've been called to do!