Whether you’re trying to avoid overdrafting your bank account or simply planning the best time for a large expense, a cash flow projection can help your nonprofit organization predict when you might have a shortage or surplus of cash. Your organization might own a number of valuable assets, such as land or buildings, but without cash in the bank you won’t be able to pay your bills. A cash flow projection estimates how much cash your organization will receive and spend over a certain period, as well as when you can expect to receive or spend those funds. Cash flow projections can be helpful for your organization’s managers, your board of directors, and lenders seeking assurance of your ability to repay loans on time. Your cash flow projection should give you advance warning about lean financial periods, so you don’t fall short of cash.
To create a cash flow project, first begin with a copy of your organization’s budget. Determine how much cash you have on hand right now, which gives you your opening balance. Then estimate your incoming cash for the next period. You may want to look at trends from previous periods and compare those numbers to your budget. Consider all sources of revenue, such as grants, board giving, contracts, contributions, sales, etc. Then do the same for each of your expense categories: payroll, taxes, rent, fundraising expenses, office supplies, etc. Finally, subtract your estimated expenses from your estimated income and add that to your opening balance. This will tell you how much cash you can expect to have on hand at the end of the period. Repeat this for each period you would like to cover. It’s common to prepare cash flow projections on a monthly basis, covering a period of a year, but you may find it helpful to prepare weekly or quarterly projections instead depending on your organization’s cash fluctuations.
If a cash shortage is expected, your cash flow projection can give you enough warning before it becomes a true emergency. This will give you time to find a solution. Is it possible to speak with funders to convert restricted dollars to unrestricted for general operations? If an event is cancelled, would people be willing to make their event ticket purchase a donation versus requesting a refund? On the expense side, what is the impact of non-mission critical expenses? Are they necessary? An accurate cash flow projection buys your organization time to think, and allows you to see potential problems on the road ahead.
Cash flow projections are not infallible, and should be revised frequently when changes occur. If your organization encounters an unexpected cash shortage, be sure to communicate with your board, staff, and funders about the current situation and discuss revisions to your cash flow projection.