Running a nonprofit comes with plenty of challenges. One of the most important areas is managing finances well.
Nonprofits often face cash flow issues. Many organizations receive their funding in chunks. For example, year-end donations or at big events like your annual gala.
Payroll happens every two weeks though! This can create big peaks and valleys when it comes to cash in the bank.
Without enough cash on hand, it’s hard to plan, grow, and keep your nonprofit running smoothly.
One tool that can help you manage your money is a cash flow forecast. This tool helps you estimate how much money will come in and go out over a set period, say 12 months.
By using a cash flow forecast, nonprofits can avoid financial surprises. It can also give you confidence to plan for the future.
Why Nonprofits Need A Cash Flow Forecast
1. Keeping the Nonprofit Running Smoothly
By forecasting, you can plan for months when you won’t have a lot of money coming in. It helps you cover important costs like paying your staff or keeping the lights on, even when donations are low.
2. Making Smart Financial Decisions
A forecast shows whether you can afford to spend money on new projects, staff, or equipment. It helps you make good choices and prevents overspending. This can free you up to make that big new hire to take you to the next level!
3. Avoiding Money Problems
Cash flow forecasting can help you avoid unexpected problems. If you know in advance that you’ll have less money in a few months, you can plan for it before it becomes a crisis. If you can see this enough in advance you can take proactive steps before it causes issues.
4. Handling Different Types of Funds
Nonprofits often get restricted and unrestricted funds. Restricted funds must be used for certain purposes, while unrestricted funds can be used more freely. By forecasting both types, you can make sure you’re using your money the right way.
5. Building Trust with Donors
When you show donors that your nonprofit has good financial planning it builds trust! A forecast shows donors how their donations will be used. It also reassures them that you’re managing the money wisely. Dollars often follows trust when it comes to donors!
How to Create a Cash Flow Forecast for Your Nonprofit
1. Look at Past Financial Data
Start by looking at your financial records from the past year. This will help you understand how much money came in and went out each month. A simple first step is to apply a % increase (or decrease) to the last 12 months. This often doesn't tell the full story, but it's a super simple way to get started!
2. Estimate Future Income
Think about how much money you expect to come in over the next year. Make a list of all the ways you'll bring money in. This could include: events, corporate partners, grants, individual donations, etc.
Be conservative on when you think you'll actually receive the money.
3. Estimate Future Expenses
Write down your nonprofit’s expected expenses. These could be things like rent, salaries, program costs, or supplies. Make sure to include any large one-time expenses you know are coming up.
4. Update the Forecast Monthly
You should update your forecast every month or quarter as new information comes in. This helps you stay on top of changes in your financial situation.
5. Plan for Different Scenarios
Try running different scenarios to see how changes in income or expenses could affect your nonprofit. For example, what happens if you get more donations than expected? Would you put it in reserves or make that big new hire? What if a major grant is delayed? Would you need to make serious changes to spending or could you make it for a while? This helps you prepare for different situations.
Common Mistakes to Avoid
Even with the best intentions, some nonprofits make mistakes when forecasting.
Avoid these errors:
Overly Optimistic Forecasts
Don’t assume all the money you expect will come in exactly when you need it. Be conservative with your estimates.
Ignoring One-Time Costs
Include one-off expenses in your forecast, like buying new equipment or launching a new program.
Not Updating It Regularly
Forecasts only work when they're maintained. Make sure to review and adjust them as needed.
Stay Financially Healthy
It's hard to balance driving your mission forward while managing a growing organization.
By using a cash flow forecast, you can make sure your nonprofit is prepared for financial ups and downs.
It will help you take advantage of opportunities, make smart decisions, and avoid running out of cash.
If you need help creating a cash flow forecast for your nonprofit, we're here to help. We can provide a custom forecast tailored to your nonprofit.
Book a free consultation and take control of your nonprofit’s financial future!
Not ready for this yet? No worries, check out how we've helped other organizations here.
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