Effectively managing your nonprofit’s finances is always important, but even more so when times are uncertain. Forecasting your cash flow, for example, can help your organization respond and adapt to immediate financial challenges. Equally important, cash flow forecasts are a vital tool for ensuring your nonprofit organization stays healthy and viable in the long run.

What is a cash flow forecast?

A cash flow forecast is a projection of the cash you expect to have coming in and going out in the future. Because it’s based on your organization’s plans and activities for the upcoming year, your annual budget plays a key role in supplying the expected expense and revenue figures for your cash flow projection.

Why cash flow forecasts for nonprofits are important

Like most for-profit organizations, your NPO likely has ongoing operating expenses (like rent or program costs, for example) that need to be covered. Unlike many for-profits, however, you may lack regular income.

Whether you’re a director, board member, or financial manager, keeping your nonprofit financially solvent is crucial. A cash flow forecast can help in several ways:

Tracking performance. Comparing both your projections and your actual activities against your budget lets you track your financial performance.

Spotting opportunities & challenges. Forecasts make it easier to plan the use of working capital around emerging opportunities and anticipated problems.

Responding to change. While new information or events can lead to a change in plans in any given year, they don’t always warrant revising your annual budget. Cash flow forecasts are an ideal tool for responding to unanticipated change.

Creating multiple cash flow projections

Many organizations find it helpful to create multiple cash flow projections for various scenarios. Known as scenario planning, a cash flow projections template will make this strategy more efficient.

Here are examples of some scenarios you could forecast:

  • Receiving a large unrestricted donation 
  • Losing volunteers due to social distancing
  • Receiving rent in kind (getting free rent for your event space) 
  • Losing funding due to a recession

The advantage of creating various cash flow projections is that you can plan your response to different outcomes.

If your main source of revenue is in-person events at public schools, for example, COVID-19’s school closures may have closed off that income. Creating multiple cash flow forecasts around alternate program delivery methods (like online events, for example) lets you see what income and expenses you can expect.

Building cash flow forecasts for nonprofits

Before you start building your cash flow forecast, you’ll need to determine if it should be based on your operating expenses, program expenses, or both.

NPOs with a lot of restricted funding, for example, typically need to monitor their operating funds closely since most of their cash is restricted to program activities. 

Once your expense base is clear, you can create the 2 components that make up most cash flow forecasts for nonprofits.

1. Anticipated cash collection

Examples: Donations, fund-raising receipts, grant payments, fee for service revenue

Use your income statement and budget to determine your expected cash inflow and remember that it can vary significantly. Income from a fundraising event, for example, may be impacted by whether tickets are sold, when they’re sold (in advance or at the door), payment types accepted (cash, cheque, credit), and when those payments enter your bank account.

Note: If your organization uses the accrual method of accounting, you should expect differences between cash received on your projection versus revenue recorded on your income statement.

2. Anticipated cash payments

Examples: Operating expenses (like payroll costs, rent, administrative costs), program costs (like events or honoraria)

Use your income statement and budget to determine your expected cash outflow and remember that it can fluctuate from month to month. If you host an annual fundraising luncheon in June, for example, expenses for that month will be higher than usual. Understanding your programming and plans for the year ahead will help you forecast accurate expenses.

Note: If your organization uses the accrual method of accounting, you should expect differences between cash payments on your projection versus expenses recorded on your income statement.

Most organizations build cash flow projections for the 12 months ahead, separated by month. Use your statement of financial position (or balance sheet) to find your starting cash balance, then review your forecast monthly – or more frequently if your organization’s cash flow is especially tight. 

Putting your cash flow forecast to work

Timing is everything when it comes to cash flow. The biggest benefit of building cash flow forecasts for nonprofits is that they can be used to identify and respond to cash deficits and cash surpluses in advance.

Managing cash deficits

Pinpointing a cash deficit in a specific month lets you be proactive about finding ways to manage it:

Increase your fundraising efforts

  • Reach out to donors sooner
  • Submit grant applications earlier
  • Ask current funders to provide payments ahead of schedule

Change the timing of incurred expenses

Delay a new program or project scheduled to launch during a cash deficit month until you have sufficient funds on hand. 

Reduce operating expenses

  • Leverage cloud-based technology to avoid upfront software costs
  • Reduce employee travel
  • Scale back on events and programming
  • Outsource back-office functions  

You can better manage deficits resulting from COVID-19, for example, by applying for the Temporary Wage Subsidy or Canada Emergency Wage Subsidy instead of reducing your headcount. 

Apply for loans

This is usually a last resort for extreme cash flow issues. If your cash flow has been disrupted by COVID-19, however, you might consider applying for the Canada Emergency Business Account loan. Imagine Canada has compiled a helpful list of federal initiatives available to most organizations.

Managing large cash surpluses

Identifying large cash surpluses in advance helps you determine the best time to invest or pursue growth opportunities, such as:

  • Purchasing GICs
  • Starting an internal project like office renovations
  • Purchasing new equipment
  • Bolstering your reserve fund’s cash balance 

Managing cash flow for nonprofit organizations can be an ongoing challenge. Thankfully, cash flow forecasts are an effective way to avoid running out of cash unexpectedly.

Not only does forecasting let you plan around multiple financial futures, it also helps you track and manage financial performance by showing you where potential problems and opportunities lie.

Talk to your Client Success Lead about how Enkel can help you better forecast your NPO cash flow. Not an Enkel client yet? Get in touch! We’d love to show you how our accounting services help NFP leaders.

And in the meantime, don’t forget to join our free webinar!

Free Webinar: Helping your not-for-profit organization weather the economic storm

This May, we are organizing a free webinar with our friends at CharityVillage. COVID-19 has caused immense disruption to our economy and we’ve seen many NFP organizations across Canada struggle to retain donors and stay afloat. Our webinar aims to provide NFP organizations with strategies and measures that they can take to stay financially and operationally strong during these challenging times. 

If your organization’s operations or finances have been badly affected by COVID-19, we would encourage you to tune in to this webinar. Our NPO accounting manager will be sharing useful tips that organizations can implement in the short term to weather the economic fluctuations. Register today to save your spot!

This webinar will be recorded. If you are unable to make the live session, complete the registration form and a recording will be emailed to you the day after the live session. 

We have also created a pre-webinar survey to help our presenters best determine the content that will be most helpful to our audiences. All responses will be completely anonymous and strictly used for the purposes of this webinar. 

Flannery May is the NPO Accounting Manager at Enkel Backoffice Solutions. Headquartered in Vancouver, Enkel provides bookkeeping, payroll, accounts payable and accounts receivable services to over 200 organizations Canada-wide.