Three Reasons to Love Cash Flow

“I just don’t want to see what is out there,” admitted a client I was talking with about using cash flow projections. This client did not want to use a cash flow projection because their intuition told them it was going to show negative cash flow throughout the fiscal year. While the fear can be real, not knowing you’re going to run out of cash-on-hand in three months is far more terrifying.

While a budget tells you how much money is coming and going, a cash flow projection tells you when. It’s wishful thinking to divide your projected revenues and expenses by 12 – I’ve seen a lot of nonprofit business models, and none have a steady stream in either direction. For example, our nonprofit theater partners invest heavily before performances and must plan for ticket sales to repay those expenses, whereas charter schools often utilize lines of credits until their holdback payment from the government comes in around January. In either case, they need to plan ahead at least 12 months for these cash ebbs and flows.

At Propel Nonprofits, we advocate developing (and maintaining) a 12-month rolling cash flow. One of the first questions we ask when we meet a new client, and a question I ask when checking in with existing clients, is always, “What’s your cash flow projection showing?”

I encourage every client to develop and maintain a cash flow projection for these three key reasons:

1. The thought process of developing a cash flow projection sharpens your forecasting and pushes you to understand your business model at a granular level. Knowing when the checks are promised, which months tend to see cash outflow spikes due to three pay periods, or when your casualty insurance is due will fundamentally deepen your understanding of your organization’s cash cycle. If you, like my client, have been keeping this deep knowledge in your gut, putting it into a spreadsheet will be far more helpful – we even have a template for you to get started.
2. Because a cash flow projection touches programs, development, and operations, it is a useful leadership development tool. When starting a cash flow projection, we recommend meeting with the individuals on your team who know incoming and outgoing expenses or revenues. Get your development, program, and finance directors in a room. Go month-by-month on your anticipated cash in and cash out. Use this time to bring more people into the business model analysis of your organization. It increases the transparency to your leadership while also sharing understanding of why key purchases or program investments might need to be delayed.
3. Cash flow projections, which are inherently forward-looking, allow you to see potential opportunities in cash surpluses and face the realities of cash shortages. Budgets are incredibly useful in the strategic decisions and for general oversight of an organization’s health. But they are not day-to-day, working-the-project, management tools, and too often they’re set by outside entities (i.e., funders). Many of us are tied to the 12-month budget timeline, or maybe within a 24-month federal grant period. We race toward our year-end or grant deadline, get our surplus (!), and then restart our engines for the new year. A cash flow projection, however, is updated to continuously look ahead 12 months regardless of the budget period or major grant funding budget period. This means that with a cash flow projection, more so than a budget, you have options. You can call funders and ask for checks earlier, develop a small fundraising campaign to fill that gap, move to twice a month payroll instead of every other week, put off that major printing purchase until later, or call Propel Nonprofits and talk about a short-term cash flow loan. A cash flow projection forces you out of reactionary mode and into a strategic, adaptive mindset by helping your nonprofit see the monthly impact of your financial decisions in advance.

I worked with the client mentioned at the beginning to develop a cash flow projection and their concerns were confirmed: their nonprofit was facing a cash shortage in the coming months. Rather than let the dread grow and live just inside that one person, the organization’s cash reality is on paper and can now be shared and discussed. The board and staff can work on options of how to manage the cash flow. That’s the true brilliance of doing cash flow projections: it allows others to assist in the problem solving. I am a strong supporter of leaning into your own intuition about what is going on in your business model. If your gut is telling you something’s not working, map out your cash flow and figure out why and when.