Just like any other business, a nonprofit organization must maintain its cash flow to pay its bills. In addition, the amount of work of the nonprofit can do at any given time depends on how much money it has to spend. A cash flow statement not only helps a nonprofit plan its bill-payment schedule, but it also helps the organization plan fundraising events and activities.
Cash Flow Statement
A cash flow statement differs from a budget in that it shows when money comes into a business and when it leaves, rather than when income and payments are promised. For example, a 5K breast cancer race sponsor might agree to a $5,000 title sponsor fee for a March event. The sponsor might not pay that fee until after the event and an audit shows it received all of its contracted benefits. An annual budget might record that $5,000 sponsorship in January or February, when the sponsorship sale is made, while a cash flow statement will show the $5,000 in April, when the money is received. This will depend on whether you use the cash or accrual method of accounting.
Accounts Payable Planning
Using a cash flow statement, a nonprofit can determine its ability to pay its current and upcoming obligations. Once it knows this, it can take steps to ensure it keeps enough cash on hand to pay its bills each month or arrange to have credit available during periods when cash might be tight. Just like any other business, if a nonprofit misses a payment or is late with a bill, penalties can result, including increased interest fees, the loss of access to a vendor or supplier and damage to its credit report.
Charitable Activity Planning
Using cash flow statements, nonprofits can schedule and plan activities to avoid times when money is tight. For example, instead of running a telethon and kids camp the same month, the nonprofit might schedule the camp two months after the telethon so it has money to pay camp bills. While a telethon might raise $10,000 worth of pledges, donors who make those pledges might not send in their checks for several months. Using the organization’s past cash flow history, the nonprofit can better plan its activities. This is especially important if the nonprofit gives cash awards, grants or donations of goods it purchases.
Fiduciary Responsibility Requirements
The board of directors of a nonprofit organization has a mandate to stay current with the organization’s finances. Some nonprofits rely on a treasurer to keep them updated, while others form a finance committee to oversee the organization’s finances and keep the board up to date. A board of directors -- or the organization's treasurer, at least -- should see bank balances and detailed financial reports, including balance sheets, ledgers and cash flow statements. A cash flow statement lets board members know if the organization is paying its bills on time, if it can negotiate better credit terms or if it is cutting it too close with the timing of some activities based on expected revenues.
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