Accurate forecasting of your organization’s cash flow is vital for healthy operations. According to the National Association of Nonprofit Organizations & Executives (NANOE), one reason that nonprofits fail is poor accounting and money management. Cash flow management is money management, or the management of cash on hand, related to expenses. If you aren’t managing your cash flow, you are potentially putting your organization in financial jeopardy.
Fortunately, there are many steps you can take to improve cash flow forecasting. Understanding how to improve cash flow forecasting and accuracy is the first step to shoring up your organization’s finances and ensuring you have enough money to pay for upcoming expenses.
What Is Cash Flow and Why Is It Important?
First, here is a quick definition: What is cash flow? Cash flow refers to the movement of money into and out of the organization’s accounts over a specific period. It includes all cash transactions related to operating activities (such as donations, grants, and expenses), investing activities (like purchasing or selling assets), and financing activities (such as loans and fundraising events).
Essentially, cash flow measures the liquidity and financial health of the nonprofit, indicating its ability to generate cash to meet obligations, fund programs, and support its mission. Accurately forecasting cash flow ensures the organization has the funds it needs to meet current and future expenses.
Five Steps to Better Cash Flow Accuracy
There are several steps you can take to improve the accuracy of your cash flow forecasting.
- Establish Lines of Communication: Effective cash flow forecasting requires input from various individuals within the organization to provide accurate figures and insights. A central source of financial information, such as nonprofit accounting software, can help everyone in your organization provide timely input into expenses and revenues.
- Cash Flow Differs from Revenue: Cash flow and revenue are related but distinct concepts in a nonprofit organization. Revenue refers to the total income generated by the nonprofit from its various activities, such as donations, grants, membership fees, and fundraising events. Cash Flow refers to the actual movement of cash into and out of the nonprofit’s accounts. Cash flow measures the liquidity and financial health of the organization, indicating its ability to generate cash to meet obligations and fund its programs. Revenue shows the total income earned; cash flow provides a more comprehensive picture of the organization’s financial health by tracking the available cash. Understanding the distinction between these two terms is vital to track cash flow accurately without conflating it with revenue.
- Identify Your Inflows and Outflows: Carefully monitor all cash inflows and outflows. Periodically review this data with your entire team to ensure it is up to date.
- Visualizing multiple future cash flow scenarios helps in adapting processes quickly. You can then monitor the situation and determine your next steps based on the previously developed ‘what-if’ exercises and scenarios.
- Publish the Forecast, Monitor, and Adjust Results: Continuously monitor and adjust your cash flow forecast based on real-time results. By monitoring cash flow in real time, you’ll be able to improve your forecasting accuracy and ensure adequate cash for current needs.
Nonprofit Accounting Software Makes Cash Flow Forecasting Easier
Nonprofit accounting software makes cash flow forecasting easier and more accurate by automating data entry, providing real-time reports, and offering budgeting and forecasting tools. It tracks restricted and unrestricted funds separately, integrates with donor management systems to predict future donations, and helps manage expenses by categorizing and tracking them. The software ensures compliance with financial regulations and provides transparent financial reporting, which is crucial for maintaining donor trust and securing future funding. By using these features, nonprofits can create more accurate cash flow forecasts and improve their financial stability.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.
Recent Comments