Being profitable on its own shouldn’t be your only financial goal; you also need to be able to generate cash flow from your operations. If you don’t maintain enough liquidity, you’ll struggle to pay bills and, longer-term, you won’t be able to invest in equipment and expansions to maintain or improve your programs.
Cash flows don’t always match the timing of revenue and expenses. For example, a funder may commit to giving you a grant but not send the money for a couple months. Depreciation will increase your expenses but not impact your cash balance. In addition to an operating budget, you should also maintain a cash flow budget to predict when money will come in and go out. If you identify a future period where you’ll run a cash deficit, you can take actions ahead of time to alleviate it. You’ll also see when you’ll be bringing in a lot of cash, such as during a busy season of fee-for-service work, or a surge of donations at the end of the year, which will let you build up a reserve for times of slower business or when large bills come due.
There are several steps you can take to improve cash flows.
Prioritize unrestricted revenue. If a high percentage of your grants or donations are restricted for specific purposes or time periods, look for other sources of income that have more flexibility. The more unencumbered funds you have, the easier it is to pay general, ongoing expenses.
Diversify your sources of revenue. Government grants may be reduced or end when tax receipts fall. Foundations may change the priorities of what projects they fund. If you have a small number of donors that contribute a large portion of your gifts, you could be in a pinch if one of them stops giving. The more sources of revenue you have, the more versatile you’ll be when your funding landscaping changes and you won’t be harmed if one source drops off.
Understand when funders will pay you. When a foundation gives you a grant, will it disburse the funds near the beginning of the funding period, or after the period ends? For cost-reimbursement contracts, how long will the funder take to pay you after you invoice them? To the extent practical, try to avoid front-loading expenses on grants that won’t be paid until later in the grant period. Having several revenue streams will help alleviate this, especially with a high proportion of unrestricted funds.
Negotiate payment terms with vendors and suppliers. Some vendors will give you a discount if you pay your bill quickly. For those that don’t, hold off on paying until the bill is due to allow more time to collect incoming revenue.
Monitor inventory levels. If you sell products, don’t keep more inventory on hand than you need. Especially for products that you don’t sell many of, you don’t want to tie up more cash than necessary. It may be used better on products you sell more of, or on other expenses.
Budget a surplus. If you plan to not just break even, but have a surplus, you’ll have still have room in your budget if funding dries up, you don’t get a grant or contract you were expecting, or a fundraising appeal is less effective than in past years. For example, if you budget for a 10% surplus, but revenue is 5% lower than planned, you’ll still have a surplus if your expenses stay within the budget.
The most important part of cash management is being proactive. Pay attention to the cash balance you have on hand and what cash flows are coming up over the next several months. Compare your budgeted cash flows to what actually materializes. The more you know, the better you can plan for downtimes and make course corrections if things go better or worse than expected.