In these uncertain times, cash flow is critical regardless of whether your organization is able to stay open during the shutdown or not. How you manage your cash may determine whether you are able to reopen and survive once normal commerce resumes, or if you are open, how much you need to reduce expenses to make your new revenue goals. As hard as it is to put on paper, knowing your worst-case scenario is critical to avoiding it, and cash flow forecasting is the key.
A cash flow forecast is a tool to predict your cash position in the coming weeks and months ― something that everyone is thinking about these days. You pick a set period, like the coming month or quarter, then subtract your expected expenses from expected receipts to see how quickly you are spending cash.
A simple way to calculate this is: Receipts less payables, less payroll, less any unusual items (deep cleaning, capital expenses, etc.) equals the change in your cash position.
One thing we know is that 2020 budgets are out the window, and 2021 forecasts likely are, as well. Forecasting what you do know can help you manage through to the other side. Many nonprofit organizations already manage cash tightly and need a forecast because they don’t have the resources to manage a sudden negative stretch like we are currently experiencing with business as usual. If you have a strong cash position, forecasting is still a useful tool for managing your finances and can help you build your operating cash reserve.
A cash flow forecast helps you plan operations. Prior to the shutdown, it may have been easier to overspend thinking the cash would continue to come in at the same rate. A forecast can help identify how much you need to tighten your belt because your normal revenue streams have dried up. Or maybe you have received donations you were not anticipating as donors take advantage of the relief under the CARES Act for deductibility. It also helps you identify what your cash runway is and what funds can be used to cover expenses so you can be more proactive about reaching out to funders, liquidating assets, or exploring new revenue streams. If you are anticipating running low on cash, many nonprofit organizations quality for protections under the CARES Act,
Look at these four main factors:
This is the rainy day you have been saving for. We would normally recommend that you have at least a three- to six-month liquid reserve at all times. Hopefully your organization has a liquid reserve saved that you can dip into to help ride out these changes. If your organization does not currently maintain a liquid cash reserve, or if you do dip into it, you will want to consider budgeting for replenishment or creation of a reserve. Cash management becomes even more critical in a crisis as you may need to stretch that cash longer.
You will also want to consider upcoming activities. Are there any capital expenditures on the horizon that have been deferred? What about fundraising events that have been cancelled, or that will incur additional costs to move to a virtual format?
Once you have your cash flow forecast, compare it to your past results. If your prediction is similar to what happened in the past, that’s a good sign. Then later on, see how close your forecast was to your actual results, so you can adjust your next estimates as needed.
As you review your forecast, look for any cash flow trends. Are there certain weeks or months during each quarter when expenses and receipts are higher than usual? For example, you may notice that most of your expenses are at the start of the quarter, but your customers typically pay a month later, so you need to budget carefully until receipts start coming in.
Always use your book numbers for forecasting, not bank numbers. Your bank numbers can catch you off guard when you have outstanding checks. You should also consider payment terms for clients when forecasting cash receipts. If you give clients 90 days to pay, don’t forecast that invoices will be paid in 30 days.
Talk with your development and operations teams to understand what’s coming up and what could be changing. Is there a new marketing campaign that could increase incoming receipts? Has the development team landed a new grant or donor, and if so, what are the payment terms?
Finally, consider what’s changed since your last budget. Given that budgets are obsolete on day one, what do you know now compared to when you first put together your budget, and how will this impact cash flow?
Cash really is king for every organization, so don’t leave your planning up to chance. With a cash flow forecast, you have a simple and effective way to foresee problems and opportunities and make better financial decisions.
For the latest regulatory changes and other information on keeping your organization running through disruption, visit our COVID-19 Resource Center.
