Reviewing a nonprofit’s cash position heads off trouble, helps planning

Published in the June 9, 2006 edition of Columbus Business First

Adequate cash is fundamental to the smooth functioning, even survival, of an organization. A chronic shortage of cash is a signal you need to change how you raise funds, how you budget or how you fundamentally approach balancing growth with sustainability. 

A board needs to know at all times if there is enough cash in the organization’s checkbook to pay its bills in full and on time for the remainder of the year. It should also know when any extraordinary steps are taken to make the end-of-year checkbook look better than it was at other times during the year. 

I recommend board meetings routinely discuss and review three key questions:

• How much cash are we supposed to have? Do we have policies on holding sufficient cash?  

There is no magic amount of cash that is appropriate for an organization or that will guarantee the wolf stays away from the door. However, the board should identify the minimum cash required for operations to continue uninterrupted. 

This means preparing and discussing a monthly forecast of cash inflows and outflows and identifying the months that are likely to be the most challenging. It also means establishing ahead of time a Plan B to implement if cash balances fall below that minimum.

Sufficient cash also means the board needs to know its policies on contingency, working capital and board-designated reserves. It needs to assure that those policies are being adhered to at all times and that real cash, not pledges or receivables, is filling those reserve buckets.

The board should know the sources of the cash. An adept controller will juggle cash from restricted reserves or endowments in order to meet short-term operating cash requirements. The board should know about this and make sure there are reliable plans to repay that cash promptly and completely.

• Is there anything in the coming year that could have a significant impact on our cash?

It is especially important that the board spend as much time looking at major future cash events as it spends looking at the current cash situation. Arts organizations often have major productions that require significant cash outlays. Does the cash-flow forecast identify the months those large outlays are likely to occur and does the forecast provide strong reassurance that sufficient cash will be available in those months? 

The board needs to use the cash forecast to evaluate its risks if something goes wrong. Is the organization counting on receiving some major grants or major pledges? If the grant is denied or the pledge delayed in payment, have you identified special actions that can ensure sufficient cash to meet normal operations? 

The board should also know where its cash is kept. Is there an investment policy and is the cash invested in ways that are consistent with the likely need to draw on that cash? Is the policy being followed?

• How did we achieve the level of cash that we show at the end of the fiscal year?

A responsible board needs to look back at least once a year to summarize and review how staff managed cash flow during the year. This is especially important at year-end, when the snapshot provided by audited financial statements can paint a cash picture that is not representative of situations earlier in the year.

The board should know what was the longest time during the year the organization held off paying bills or borrowed cash to pay bills, and what amounts were involved. Were there any special efforts or events that allowed the organization to catch up on bills or repay any large borrowings? 

It is particularly important for boards to know how much of that end-of-year cash balance came from prepayments, memberships or subscriptions because the expenses that match these inflows will be demanding cash in the coming months.

The virtue of nonprofits is that they do so much with so little. The downside is that they can be particularly vulnerable to bad luck if the management and board are not obsessively vigilant in watching how cash will flow in and out during the year. 

Add these questions to the beginning of every board meeting so that they become a routine part of every meeting. Your vigilance with cash is the best way you can protect the sustainability of your mission.

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.”  www.proctorconsulting.org.

  Copyright 2006. Reprinted with permission, Business First of Columbus Inc.