Many variables play into the financial health of a nonprofit organization, but some are more significant than others. For example, having the ability to predict and plan for a range of scenarios will prepare your organization for anything that may come its way.
This article will cover how to create a nonprofit cash flow projection template and why creating a template is so important. Here are the main points:
What Is A Cash Flow Projection?
A cash flow projection is used to monitor trends that could impact your organization’s cash position.
This projection is the financial breakdown of cash outflows and inflows and how likely you’d be able to reduce the chances of running into financial trouble in various scenarios.
Your projection shouldn’t only cover when you’ll be receiving money; it should also cover how you plan to spend it. You can choose the best increments of time to measure your cash flows, such as quarterly, weekly, or monthly. That being said, it’s recommended to record your cash-flows on a monthly basis.
Why Are Cash Flow Projections Important?
Since most nonprofits lack fully consistent income but have ongoing operating expenses, understanding cash fluctuations will ensure that your organization can make informed financial decisions that will promote sustained success.
Enkel reported three main benefits of utilizing nonprofit cash flow forecasts: tracking performance, spotting opportunities and challenges, and responding to change.
1. Tracking performance
Comparing your projections and actual activities against your budget lets you evaluate your financial performance. For example, you can assess financial performance by creating a “balance forward” column.
First, take a look back at your financial records to see how much cash you had on hand to begin the first month of your annual cash flow statement. Next, add this amount to your total monthly cash (your monthly revenues less expenses) and place your findings into the first row of the column for your first month period.
You’ll create a “balance forward” line item by continuing this process for the proceeding months. With a balance forward line item, you’ll always know how much money you have leftover on a monthly basis.
This process also allows you to look back on fiscal years and see where you may have run on lower margins and how you sustained those periods.
2. Spotting opportunities and challenges
Reviewing previously made forecasts makes it easier to identify financially efficient and inefficient programs and operations.
As your organization makes cash flow projecting a regular practice, you’ll be able to detect future trends that reflect past growth opportunities or challenges you may have faced.
If you are about to run into a cash flow deficit, you can slow down expenses such as hiring new staff or negotiating terms with vendors. Similarly, you can also speed up expected income by shortening the window of time for accounts receivable or introducing new automatic payment options.
3. Map out your principle gift cycle
Cash flow forecasts are an ideal tool for responding to changes because they allow you to observe and test the financial impact of emergent issues. For example, if a donor’s pledge falls through, you use your projections to predict how total revenue will be affected and how you can make up for that loss in the preceding months.
If executed and monitored correctly, your fluctuating financials should always be resistant to cash flow problems. You can respond to and prepare for change by planning ahead of time, developing realistic budgets, making modest projections, and building internal cash reserves over time.
What Makes Up A Cash Flow Projection?
Generally, two main components make up most nonprofit cash flow projections: anticipated income and anticipated expenditures.
1. Anticipated income
Here are some examples of anticipated income:
- Government grants and contracts
- Fee for service operations
- Funds raised from “X” event
- Other income
Use your anticipated income to determine where your revenue is likely to come from. But, keep in mind that this projection may vary significantly from your actual revenue.
For example, you may list a future fundraising event as a possible source of income. But, event funds can vary based on factors such as tickets sold, funds raised, and payment method fees.
2. Anticipated expenditures
Here are some examples of anticipated expenditures:
- Administrative costs
- Event costs
- Interest on debt
- Professional service fees
Use your anticipated expenditures to evaluate expected cash outflows. However, keep in mind that those numbers can vary from month to month.
On top of your anticipated revenues and expenses, track your actual financial performance. Having your actual revenues and expenses alongside your projections will provide you with the information you need to identify opportunities, respond to change, and make more accurate projections.
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Best Practices for Creating a Nonprofit Cash Flow Projection
The foundation of a nonprofit cash flow projection is fairly simple. You need to analyze revenue streams from previous fiscal years and anticipate trends. You can anticipate trends by analyzing historical giving patterns, philanthropic trends, and partnership agreements.
Keep in mind that it can be very easy to become too optimistic about your anticipated income. So if you have a major donor in the works, but they aren’t secured yet, don’t include their donations in your projection.
Additionally, whatever range of income you expect to receive, project from the low end. Remember, especially after the pandemic — we’re planning for thin margins and worst-case scenarios. Besides, if you’re operating on a surplus, it’ll be easy to put that money to good use.
You should also determine whether your projection will be based on operating expenses, program expenses, or both.
Many organizations also find it beneficial to create multiple cash flow projections for different plausible scenarios, also known as scenario planning. Here are some examples of scenarios that you could forecast:
- A global pandemic
- The loss of a major donor
- The loss of volunteers
- Increases in service prices
- Continued increases in donations
The advantage of scenario planning is that you already have a tentative plan in place to respond accordingly when and if these situations do arise.
Practicing financial literacy by conducting cash flow projections will allow your organization to track and manage potential problems and opportunities. This type of data tracking provides pertinent information to make informed decisions and promote financial stability.
So, a nonprofit with a clearer financial vision is a healthier one.