November 21, 2017
 
Beware the “Cash Wolf”

By David Orlinoff

David Orlinoff
Nonprofit organizations generally know that cash is vital to their operations (“no money, no mission”), but they often don’t realize they’re in jeopardy from the “cash wolf.”

“Wolf” is “flow” spelled backwards, and “cash wolf” is shorthand for a handful of factors that can eat up the organization’s cash while nobody’s looking.

Briefly, here are five ways the wolf can take a bite out of your cash, even if you are experiencing positive results from a profit-and-loss perspective:
  1. The accounts receivable bite. Nonprofits mostly report their revenues based on invoices issued and possibly pledges recorded, not on cash collections. It is often the case that organizations do not devote enough time to following up on outstanding billings and pledges. Therefore, your revenue as reported may exceed your expenses, but the cash coming in might be significantly short of reported income. Your organization should have a procedure in place to review accounts and pledge receivable agings to ensure that timely and effective follow-up is applied.

  2. The accounts payable bite. Nonprofits often do not manage their accounts payable in an organized fashion. The typical organization operates on a “see the bill; pay the bill” process rather than planning its payments in accordance with vendors’ terms and expectations. Your organization should develop procedures that will enable the conservation of cash while maintaining a top credit rating.

  3. The capital spending bite. This is potentially the largest exposure that you may be facing. Most nonprofits don’t create and monitor a capital budget with the same degree of attention they put into their operating budgets. Therefore, you may be spending large chunks of cash on purchasing new assets (equipment, real estate, vehicles, etc.), which will not show up on your budget-to-actual reports for revenue and expenses. Your organization should be monitoring capital expenditures against an appropriate spending plan to ensure that such investments are disbursed only from available funds.

  4. The seasonality bite. Often, the majority of a nonprofit’s expense items have a relatively consistent pattern. For example, salaries, occupancy costs, and fringe benefits usually get paid on a periodic basis, either monthly or on a shorter payroll cycle. Revenues, however, may not follow as predictable a pattern. Many organizations with a lot of private fundraising income get a spike in contributions around the end of each calendar year, while those who depend more on state grants and contracts can experience very low receipts in the summer months. Even some expenses can have a seasonality factor, especially those related to special events. Your organization should be careful about making significant commitments for outlays during typically low cash seasons.

  5. The “uh-oh” bite. It’s not just nonprofit organizations that are subject to unpleasant, expensive surprises, but it is frequently the case that nonprofits don’t have a rainy day fund to fall back on. The conventional wisdom is that a nonprofit should have a cash reserve of six months of expenses, but realistically, how many organizations can afford to maintain that level of unused cash, especially in a post-financial-crisis world? Your organization should have a disaster recovery and business continuity plan in place, and an element of the plan should be identification of a short-term source of cash such as a bank line of credit. By the way, lines of credit are good for seasonality issues, as well.
In the fable of the three little pigs, it’s the third pig’s brick house that saves the day. Make sure you strengthen your organization’s defenses against the cash wolf, using these three important techniques:
  • Monitor your cash regularly. There is no substitute for a daily report of cash receipts, expenditures, and balances. Know where you stand,

  • Forecast your cash effectively. Make sure you plan correctly for recurring cash expenditures and receipts (such as payroll or rent) on their actual due dates, and use best available estimates for non-recurring inflows and outflows. Don’t forget to take planned capital purchases into account.

  • If you don’t already have a line of credit, get one. The best time to borrow money (or at least to arrange to borrow it) is when you don’t need it, so don’t wait until seasonality, business reversals, or unforeseen events happen.
David Orlinoff is the founder and principal of Concord Financial Organization, which provides interim financial management and related consulting services to nonprofits throughout New England. Contact him at orlinoff@1cfo.com or 978 828-6100.
August 2013

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