One of the basic responsibilities of a Board is to ensure there are adequate financial resources for the organization to fulfill its mission. Striving for the desired three-to-six months of operating cash reserves is never easy, and we continue to see nonprofits struggle with limited cash operating reserves. Not having sufficient cash reserves makes it difficult to deal with unplanned reductions in funding, build organizational and fundraising capacity, and invest in new programs.
So how does a Board spot a cash flow problem? For starters, the books and records should be maintained on an accrual, and not a cash basis, and the Finance Committee should receive a detailed balance sheet/statement of financial position along with the detailed actual-to-budget income statement/statement of activities. Without knowing what is due to the organization (receivables) and what needs to be paid out (payables), it’s impossible to assess cash flow needs.
Here are just a few questions to ask when reviewing financial information:
- Decreasing cash balances: Are billings being submitted on a timely basis for services provided during the month? Is it taking longer to collect on receivables? Does the organization need to apply for a line of credit? Do expenditures need to be cut back until cash can be replenished?
- Increasing accounts receivable: Is the collection process effective? Are billings being disallowed by funding sources?
- Increasing accounts payable: Are vendor payment periods being stretched beyond what is acceptable?
- Increasing accrued liabilities: Is payroll being paid on time, including employee withholdings? If the organization has outside financing, is interest being paid when due?
- Revenues under budget: What is the forecast for the remainder of the year? Do expenses need to be cut? Does the organization need to delay filling positions? Do fundraising efforts needs to be increased?
If cash flow is an issue, a cash flow forecast should be part of the package the Finance Committee reviews on a regular basis.
