changes

Well, I checked again today and normal is still missing from the dictionary for most of us. Post-COVID-19 pandemic has taken its place and in the space for definition, there’s a big, bold question mark! A lot is still in flux. Nonprofit organizations continue to deal with upheaval in staffing, accessibility, and resources. Federal and state funding assistance related to the pandemic has dried up and mandatory loan repayments are upon us. Economic uncertainty and rising costs seem to be significantly spooking the small to mid-sized donor pool.

The current economic situation is creating a cash crunch for many nonprofits, with the potential of a future cash crunch to impact many more. The time to prepare is now!

Gain control of the situation and better position your organization with the following action steps:

Secure a line of credit that will cover 2-3 months of payroll & benefits

Providing service is what you do, so providing employees with stability is essential to a speedy recovery from slumps in cash receipts. If you have an established and positive banking relationship, start by contacting your relationship manager to understand that institution’s application process and associated fees. All banks and financial institutions are not created equal when it comes to lines of credit for nonprofit organizations. Some require collateral or a personal guarantee. Some will charge an annual maintenance fee or a fee for failing to use the line periodically. Therefore, research options at other financial institutions even when you have a strong local relationship and consider the relationship as just one variable in your final decision. Leverage the influence of your board. Ask board members for referrals to their financial institutions. Reach out to state and national organizations that support nonprofits, like KNN, for referrals to resources known to be generous and fair to organizations your size. Established nonprofits can generally qualify for an unsecured line of credit that is sufficient to cover 2-3 months of payroll and benefit expenses. If denied in a first pass, ask why and continue to shop around while you work on eliminating the barriers to your success.AMA – 2023 Code changes and descriptors

Monitor working cash reserves each week

Determine what the monthly average total cash out is for the organization. This doesn’t need to be precise or require a sophisticated accounting system. If your payments are issued from one primary operating checkbook, just see how much went out of the checking account for the past year and divide it by 12. Apply common sense to the result. If it seems too high, make sure there wasn’t an unusual transaction or a bank transfer/adjustment that was mistakenly captured in your numerator and rework the math. If it seems too low, perhaps you have a second bank account used for payroll or other primary expense and the same exercise needs to be applied to that account to get a final result. Once you have confidence in the monthly average spend of the organization, determining working cash reserves is a quick calculation. Begin with cash in the bank. Add any investment that you can cash out within a week (in the event of an emergency) and subtract the bills you currently owe. Divide the result by monthly spend. If the organization has less than 3 months of working cash reserves, measures should be taken to move the needle.

Vet expenses before they occur

Budgeting is an important part of long-term sustainability. A cash crunch, however, is not the time to fall back on “it’s in the budget” as justification for incurring a cost. Each commitment should be laid up against the simple outcome of short-term mission sustainability. Invest in paying the bills that keep the organization open and aligned with its core commitment to the community it serves. Nonprofits depend on public trust. Breaking that trust by failing to deliver on the mission will only jeopardize future cash flow and could create a negative cycle that can’t be remedied. Now is the time though to delay expenditures that go above and beyond the core commitment and those that are intended to create organizational growth. The investment in those expenses will result in better returns when they can be initiated from a place of cash stability. Be patient and focused in expense management until the organization is beyond its cash crunch.

Become a master of timing

Know when bills are due and what the consequences are for late payment. Avoid incurring interest and late payment penalties but also don’t be tempted to pay anything early because it’s small or there is money in the bank at the time bills are being paid. Having the cash available right now is of greater value than a minimal discount or the slight goodwill gained by early payment. Take the time to know your recurring vendors and negotiate for better terms or payment plans whenever you can. If you cannot pay all your bills by their due date, pay in full those that cannot be delayed without penalty and then negotiate a plan to pay those that remain within a reasonable period of time. Try to avoid drawing on the line of credit for accounts payable so that you have confidence in the organization’s ability to manage payroll.

Examine your cycle of cash receipts. Are there any gifts, grants or sales that you can encourage an earlier payment on with prompt or accelerated reminders, invoices or phone calls? Take that action. If you need to draw on the line of credit, repay that balance as quickly as you can to maintain its availability and mitigate finance charges.

Do the deep thinking and act

Is this cash crunch a timing issue or a systematic one? Consider revenue sources and their sufficiency to generate the cash needed to cover cover investment in the expansion of your mission beyond current payroll and operating expenses. Expanding the mission may mean service to a wider base or diversification of services currently offered. It may mean developing the infrastructure to pivot more quickly to the changing needs of your specific community. Regardless of what it means to your organization, just enough isn’t a healthy long-term vision for cash management. Review receipts and expenses for the past several years and determine if your post-pandemic receipts can realistically outpace the organization’s basic cost of operations. If not, consider promptly engaging the board in strategic planning to sustainably reframe the organization.

If timing is the issue, take action to move further away from the cash crunch cliff. Make reserves part of the budget until you’ve reached a cushion equal to 6-12 months of monthly average spend. This reserve and the line of credit should give you the bumper you need to weather typical economic cycles and cost increases while you retool your revenue model. To get there faster, consider a special sustainability campaign or solicitation, a targeted grant or partnership that will displace unrestricted resources so they can be set aside for the future. Share resources with other organizations. Expenses like staffing, fixed assets, and marketing can often be leveraged by partnering with a complimentary organization or a for profit that is looking for a sponsorship opportunity. Engage in solid, legally vetted agreements with clear oversight to keep these relationships healthy and beneficial to both parties. Finally, recognize that every new initiative has an element of overhead and draws resources (time) from core operations. Be sure that new ideas can clearly advance your mission and be funded before going too far into the process of can become planning and implementation. In the absence of feasibility and measurement, great ideas leading drain on cash and are difficult to unwind in a cash crunch.

Remain optimistic

Colin Powell said, “Perpetual optimism is a force multiplier.” Don’t underestimate the power of that math.

A cash crunch is unfortunate, but it’s a risk of doing business. As they say “cash is king!” Pay attention to your organization’s spending. Be good stewards with the resources you control. Pay attention to your organization’s key revenue streams. Be hone st with your board about your organization’s cash situation. Don’t be afraid to ask for help. By managing resources and relationships well, you will be able to successfully outsmart a cash crunch.

Kaydee Ruppert | Associate Director & Nonprofit Industry Advisor
kruppert@deandortonstg.wpenginepowered.com
859.425.7730