Managing Cash Flows During Times of Uncertainty

During times of uncertainty, understanding your not-for-profit organization’s cashflow becomes a valuable tool so you can better navigate your options, manage cash and direct management decisions. In this article, we explore how to take a closer look at and have more control of your organization’s cash flows.

PREPARING CASHFLOW PROJECTIONS

One way to understand your cashflow is to prepare a cashflow projection. It is intended to provide a prediction for the organization’s cash inflows and outflows, which will help identify shortages in funding an organization. This type of information is always better to address in advance. When preparing a cashflow projection, here are few things to consider:

1. The granularity of the data elements (how detailed the cash inflows and outflows need to be to accomplish any set goals; for example, outflows mapped to vendors or in totality by expense category)
2. The period and frequency of data (daily, weekly, monthly?)
3. The assumptions and number of scenarios (how to add uncertainty to the projection?)

CASH INFLOWS VS. CASH OUTFLOWS

It’s important to be granular on the cash outflows, and less so on the cash inflows. The cash inflows should be mapped by revenue source, but should not include details about members, customers or donors. These revenue sources might include meetings and events, dues, product sales, advertising and subscriptions and/or contributions. The revenue sources will be affected differently during uncertainty. Mapping each one into the projection will provide helpful insight into the order of which the revenue needs to be addressed or replaced first This prevents your organization from wasting valuable internal resources because you won’t be addressing all cash inflow sources at the same time.

Cash outflows, on the other hand, should be mapped to the vendors’ level to identify critical expenses and defer any non-essential ones. Your organization might also be able to discover other potential cost savings by finding vendors with whom you can negotiate updated terms or contracts or identifying expenses that could be curtailed. Know that at any point in time, your organization has control over its expenses to react to changes in revenue. Therefore, it’s essential to know your total fixed and variable expenses to ensure that you can make decisions swiftly. It’s easier to restrict variable expenses than fixed expenses, though it is possible to adjust fixed expenses if you’re willing to initiate difficult conversations about which ones are possible to limit or eliminate. Before you restrict your spending in response to declining revenues, bear in mind that variable expenses are used to invest in alternative activities that could potentially bring additional revenue. For this reason, focus not only on responding to the effects, but also on reversing them when dealing with a crisis.

CREATING A 90-DAY ACTION PLAN

Prepare a projection for the next six months for planning purposes, but focus your attention on the next 90 days when building your action plan. We recommend that you continuously track and revise the projection as more information becomes available, as part of a rolling 90-day cash flow projection. Why 90 days? This time period will not only allow your organization to focus on the crisis at hand, but also plan for any down the road due to changes in the risk factors or actions taken by the organization. If you extend your action plan past the 90 days in this uncertain environment, it’s possible to overestimate or underestimate cash flows. Any amount of time over 90 days might not be practical because your organization likely has many variables to keep track of during this time.

DEVELOPING POSSIBLE SCENARIOS

The next step is to develop several scenarios to increase your organization’s flexibility and  preparedness to respond to changes. Work with your team to develop a worst, an average and a best-case scenario based on the length and severity of the economic disruption. Focus on your plan of action under each scenario and think of trigger events. What will happen if revenue decreases significantly? And what does “significantly” mean for your organization? Does it mean no revenue, or a sharp decrease in revenue defined by your leaders?

If your organization needs additional guidance through this process, reach out to Sikich’s Accounting Services advisors today. Our COVID-19 Resource Center also provides more in-depth resources to help guide your organization successfully through this crisis.

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