The rollercoaster of cash flow
Even a budget that tells a positive story can have gut-wrenching plot twists along the way.
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
–Ernest Hemingway, from The Sun Also Rises
A thoughtful budget tells the story of a period of time, usually a year, where all expenses incurred are covered (and then some) by all revenue captured. If you’re a smart nonprofit, you end the year with a positive balance (net revenue), which can fuel or protect the work to come. If you’re even smarter, you consider each year in context with the years around it.
But even the smartest budget only describes the results of a full activity cycle. It doesn’t (and can’t) show the gut-wrenching plot twists along the way. That’s why you also need a projection of the actual cash you’ll have each month (or week or day) to keep the roller coaster from running into the ground.
Cash-flow projections are essential for any business, but particularly for nonprofit arts organizations where expenses and revenues are often out of sync and ideosyncratic. Sales from tickets may not arrive until after the show is built and ready. Gifts and grants frequently appear on the funder’s timeline rather than yours. And while revenue may arrive in seasonal bursts, many of your expenses relentlessly recur month after month.
The most basic cash flow projection is just a month-by-month version of your budget, with your best guess for when cash will actually arrive and depart through the year. The Nonprofit Finance Fund offers a template and tutorial for newbies, as does Propel Nonprofits. This projection will give you a first clue about months when you go underwater on available cash, and will give you time to adjust.
If things get squeaky along the way, you can also attempt to smooth the curve by delaying your payables (contacting your vendors to negotiate different terms) while accellerating your receivables (contacting your donors, grantors, or others to send cash now rather than later).
Once you get the rhythm of the roller coaster, you can take more durable steps to avoid unhappy surprises. Among them are the development of working capital (funds to maintain ordinary operations), operating reserves (funds to cover unexpected costs or losses), and risk & opportunity capital (funds to soften risk or animate new initiatives). The Nonprofit Finance Fund describes four other kinds of capital, but I won’t cover them here.
It’s a maxim in musical theater (well, in the musical See Saw, anyway) that “It’s not where you start, it’s where you finish. It’s not how you go, it’s how you land.” But, even that song admits that in order to reach the finish, you need to “take it rung after rung after rung.” Cash flow planning is one of the tedious but necessarily rungs on the rise.
From the ArtsManaged Field Guide
Function of the Week: Accounting
Accounting involves recording, summarizing, analyzing, and reporting financial states and actions.
Framework of the Week: Statement of Cash Flows
The Statement of Cash Flows is one of the three primary financial statements used by (and required for) formally organized business entities in the United States. It shows how cash moves in and out of an organization on a regular basis (often monthly).
While I recognize that the practice can be abused and provide an excuse not to engage in serious financial planning, I firmly believe that every organization with employees needs a prenegotiated bank line of credit. The one creditor who should never be asked to wait is the person doing the work of the organization.
The key to getting an LoC is a clear understanding of cash flow — here’s when we’ll need the money, here’s when we’ll be able to pay it back.
Properly managed, a line of credit can help an organization develop a reserve fund.