Cash flow management strategies for NPOs

Posted on 17 May, 2021 at 14:28

By Cheryl Musumha

 

Effective cash flow management is essential for any organisation, more so for a nonprofit. Most nonprofits find themselves experiencing a cash crunch thus affecting the smooth running of its day-to-day operations. The basic overheads should be taken care of without affecting the intended use of donor funding for the programs set. In order to do this, the following strategies can be implemented:

 

1.      Manage the timing

This can be achieved by either:

a.       Speed up receipt of income:

·         Negotiate earlier receipt of grants or contract revenue

·         Shorten the terms you allow for accounts receivable

·         Improve collection efforts for past due receivables

·         Introduce new payment options, i.e. credit cards or automatic payments

·         Accelerate or expand fund drives

 

b.      Slow down payments:

 

·         Delay significant expenditures

·         Negotiate longer terms with vendors

·         Break lump sum payments into smaller, more frequent payments

·         Delay new programs or events

·         Delay staff additions and/or salary increases

·         Borrow on a line of credit or bridge loan

 

2.      Renegotiate where appropriate 

Building relations with suppliers, landlords and contractors should be done wherever possible. Such relations can be very useful when you want to negotiate payments down or discuss on revising applicable rates for the benefit of both parties.

For well-informed renegotiation, you may need to first look at your financial statements to identify areas for cost reduction. Radical decisions like switching suppliers may need to be made if it means getting a better deal.

If you’re currently leasing a building, for example, consider whether it might make more long-term financial sense to buy a new premise outright.

3. Be proactive about building cash reserves

This has proven to now be a necessity following the covid 19 pandemic that exposed cash flow problems. In order to thrive in an unpredictable environment operating reserves are now a key part of the nonprofit business.

The global pandemic has shown that nonprofits should always have a cash float that allows them to pay for 6 months of its basic overheads without struggling. It is prudent that cash reserves are built.

 

4. Improve regular income streams

Government funding can be an unstable source of funding, and while appeals for donations can provide a welcome cash injection, this is often a short-term solution. For many organizations, adding new revenue streams can ensure a regular supply of funds. This can be likened to putting all your eggs in one basket.

There is need to think of other ways of raising income by increasing the number of income streams. For example, monthly subscriptions option and if you can, consider developing and selling your own branded merchandise. 

Closing remarks

The earlier you anticipate cash flow issues, the easier it is to address them. The most effective way to manage cash flow is to develop and maintain cash flow projections that look forward 12 months.

When you anticipate cash flow shortfalls it is easier to come up strategies to prevent this. It is key to assess whether the cash flow shortfall was as a result of timing or it is an indication of a deficit. This will help you come up with a strategy that match the source of the shortfall.