As a financial consultant turned capacity builder for Non-Profit Organisations (NPOs), I am often amazed at the lack of understanding in the importance of cash flow management among leaders in the social sector. Perhaps in the past, cash flow issues were not as apparent due to sufficient reserves. However, in a time of unprecedented economic downturn, leaders of NPOs must now prioritise cash flow management to continue fulfilling their mission without running out of money.
If you are not financially trained, or if you have no idea what cash flow management is, I have two pieces of news for you. The bad news is that, compared to the corporate world, there are very limited options to help NPOs with cash flow. For example, NPOs in most countries are not eligible for bank loans. On the flipside, the good news is this means there are only a few things you need to learn to be on top of your organisation’s cash flow situation. Trust me, if you can read your personal bank statement, you will be able to understand cash flow management.
There are three main misconceptions about cash flow management:
- Spending within budget = Managing cash flow
- Managing cash flow is the finance team’s job
- Future cash flow needs to be projected as accurately as possible
If you believe any of the above is correct, read on.
Misconception 1: Spending within budget = Managing cash flow
Most NPOs operate with an annual budget (including income and expenditure) where they control and track their actual spending against the budget. However, spending within budget does not guarantee that you will have cash to pay for those expenditures.
This is similar to how we manage our personal finances. For instance, you could have budgeted for a new phone for October. But you may not have enough cash on hand to pay for the phone before your October’s salary comes in on the 25th. I am sure there are many other instances where you can afford something yet do not have sufficient cash to pay for it at that moment.
And that is where the key difference between budget management and cash flow management lies:
We all need to go beyond managing our budget to managing cash flows as well. The shift requires you taking into to take into account the time factor when managing your income and expenditure.
For example, if a large grant that was supposed to come in this month gets delayed to 2 months later, would you have sufficient cash to pay your employees and vendors in the meantime? You will not know unless you are keeping tabs on your cash flow position.
Once you are aware of your cash flow position, you can then implement various strategies to improve your cash flow position. The rule of thumb is to always spend within your means, to collect money as fast as you can, and to stretch payment as long as possible.
Misconception 2: Managing cash flow is the finance team’s job
It is not wrong to think that the finance team should be responsible for cash flow management. Since the finance team usually has access to bank statements and other financial information, they should rightly be the ones to monitor, report cash balance and project future cash situations.
However, to ensure and sustain a healthy cash flow, your entire management team (or even the ground staff) should be held responsible. Take grants as an example. Many grants are disbursed at key milestones contingent on the fulfillment of KPIs. When such KPIs are not fulfilled, the budgeted full grant amount may be reduced. For this, Programme leads would have more control or would be more cognisant of the possibility of not being able to fulfil certain KPIs, hence they also have the responsibility to communicate such situations to the finance team.
This is even more critical when projecting cash flows, which is based on a set of assumptions. These assumptions are usually driven by operations. In particular, finance teams would not know when the next fundraising event is, the payment terms of vendors, or whether the budgeted expenditure will or will not be spent.
Hence, cash flow management should be a collective effort by the core management team.
Misconception 3: Future cash flow need to be projected as accurately as possible
There is nothing wrong in striving to make your cash flow projections accurate. But bad news, there is just no way we can project cash flow 100% accurately as we have no control over the future. Even Doctor Strange wouldn’t be able to do that. Especially in these volatile times, there are bound to be uncertainties and risks such as the timing of when the grant may come in, or how many tickets you can sell for a virtual fundraising gala.
Instead of spending time to perfect your assumptions, you should use the time to evaluate different scenarios, i.e. ask yourself the WHAT IF questions. What if my fundraising campaign sees a 50% drop in donations? What if my fundraising campaign goes viral and donations increase by 30%?
A good cash flow projection will not only have one view of the future but give you an idea of everything that could possibly happen – the most likely scenario (base-case), the worst-case scenario, and the best-case scenario. So you will never be caught off-guard and you can evaluate different options and make more informed decisions.
Convinced but not sure how to incorporate scenario planning in your cash flow projections? Start from a robust, dynamic cash flow projection template, and apply some Excel magic to determine what actions to take based on the scenario.
Save your mission now
Cash flow management is not difficult to master once you clear these misconceptions, but it does require the whole organisation to collaborate in order for it to be done well. This is crucial to ensure you have cash to continue running your organisation, with or without Covid-19 in the landscape.
Remember, the bottom line is that you should never put your social mission at risk simply because you ran out of cash, unexpectedly.
About the Author
Peter Yang is the Founder & CEO of Empact. Over the years, he has grown to be a leader not just within Empact but also in the wider local social enterprise and charitable community with his innovative thinking and passion to positively impact social organisations.
In his work at Empact, Peter has gained valuable insights after advising and training 300+ NPOs and SEs in managing their financials. Prior to Empact, Peter also spent 8 years as a financial consultant helping government agencies and large businesses with projecting and managing their cash flows.