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Cash flow is an easy concept to understand - how much money is flowing into and out of an organization. But not every not-for-profit executive is fully aware of the impact that cash flow can have on overall financial performance. That's because the importance of cash flow is far easier to recognize in some types of organizations than it is in others.

 
Take home building, for example. When a builder takes on hundreds of thousands of dollars in short-term debt in order to build some new houses, it's obvious that the company must generate substantial positive cash flow in a hurry to survive.

Not every case is that dramatic, but generating and managing cash flow is critically important in not-for-profits, from the smallest to the largest.

Once you accept the importance of cash flow in your operation, you'll find it easier to stick to the rules of profitable cash management. Talk with financial adviser about these ways to improve financial performance:

*Never allow organization money to lie idle. Open a bank or money market account and have it linked to your checking account for telephone or online transfers. Deposit all revenue into the money market account where it immediately starts drawing interest.

*Never deposit receipts directly into a chequing account. Keep a minimum balance in the chequing account and transfer cash by phone or online as needed to cover cheques written. Worst money sin of all: Leaving cheques lying around in a desk drawer until you can get to the bank. Not only is this a security risk, sound money management requires making every cent of your organization's cash grow.

*Don't be in a big hurry to pay bills. There's a good reason why checks are sometimes slow coming in from donors: Hanging on to cash as long as possible allows that money to be available to draw interest or to work in a business. The same holds true for a not-for-profit. Take the time to set up a system that provides for paying bills only when they are due. It's easy to do. Just be careful not to go overboard and jeopardize your credit standing by paying bills late. Pay when they are due - not before, not after.

*Consider leasing. The nature of not-for-profit accounting is such that leasing can be the most sensible approach for many types of capital investment. It usually makes sense to lease if you can use the cash or investments in your operation to earn a better return than the cost of buying. Talk to your tax adviser about the possibility of leasing the next time you're considering a large capital purchase.

*Let your computer help manage cash flow. Whether your operation is large enough to make use of one of those heavyweight commercial software packages or an application on a desktop PC, trust every aspect of your organization's finances to your computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important tools for improving cash flow and fund balances.

Taken individually, simple cash management techniques may seem inconsequential. However, when you blend them together in a consistent manner, they can be a significant and permanent contributor to your organization's financial health.

Working Capital

Unlike for-profit companies, a not-for-profit organization cannot distribute profits to the principals. But you can keep an adequate supply of working capital in reserve. The reserve should cover 60 to 90 days' worth of operating expenses to help pay bills when cash is tight.