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Projecting Cash Flow
Useful Strategies for Adjusting the Timing of
Cash Flows
A Sample Cash Flow Budget
"Cash flow" management refers to the need to have cash come in --
flow in -- at the right times, so that it is available to flow out
as needed. Everyone knows that if an organization has more
expenses than income, sooner or later it will find itself in
trouble. However, even if income matches or exceeds expenses in a
given year, the cash fro m the income may not arrive in time to
pay the bills as they come due. A cash shortage can be very
disruptive to your ability to carry out your mission. To avoid
disruptions of business or to take advantage of temporary cash
surpluses, cash flow can and should be projected, monitored, and
controlled.
Projecting Cash Flow
Projections of receipts and expenditures, which comprise cash
flow, are typically developed as part of the budget process, so
that you can anticipate and develop strategies for funding the
shortages or investing the surpluses. (Many of these strategies
are described later in this response sheet.) Cash flow projections
follow a format similar to your budget's. For each month,
anticipate how much money you will receive and how much you will
spend in each category.
To try this for the first time, you must look at your
organization's prior year's checkbook as a basis for your cash
flow projection for the coming year, adjusting for any anticipated
changes that will affect the timing and amount of payments and
deposits. These changes might include when your programs are
offered, what programs are offered, new funding sources or
expiration of previous funding, increases or reductions in
interest rates, etc. While your new cash flow projection will
largely correspond to your budget, some cash flow may come in from
receivable from the prior year, cash may go out for payments made
for last year's bills, and some income and expenses for the
current year will be delayed until next year and, therefore, would
not be included in the current year's cash flow budget.
As the year progresses, cash flow projections can be updated. By
comparing budgeted cash flows to actual deposits and expenditures,
and understanding the nature of any variances, you can strengthen
your ability to accurately anticipate cash flow in the future.
Note: A cash flow budget or projection should not be confused with
a financial statement called "Statement of Cash Flows." The
statement describes changes in cash from year-to-year due to
operating surpluses or deficits, makes adjustments for non-cash
items such as depreciation, and shows increases or decreases in
accounts payable an d accounts receivable. This statement is
usually prepared by your auditor along with other financial
statements during the audit. (See Financial Management FAQ
25a:What Financial Statements are Nonprofits Required to
Issue? for further information.
Useful Strategies for Adjusting the Timing
of Cash Flow
In a simple example, imagine an organization with no cash in the
bank and a balanced budget, with $10,000 in revenue and $10,000 in
expenses. If the income is received first, the organization will
be able to spend it down as expenses are incurred. If, however,
the expenses come in before the income, the organization cannot
pay its bills until the cash is received. In this case, the
organization has a problem with the timing of cash flow
rather than a shortage of revenue or an excess in expenses.
There are common strategies for dealing with the timing of cash
flows, whether it is a cash shortage or a cash surplus.
- Meeting a Projected Temporary Cash Shortage
In order to meet a projected temporary cash shortage, you may
want to consider any of the following strategies:
- Obtain a loan, usually from a bank or an individual such
as a board or staff member.
- Arrange for a line of credit from a bank.
- Speed up the collection of receivables (money owed to
you).
- Move up the fundraising event or campaign you are
planning.
- Finance the purchase of equipment by leasing it or
paying for it over time.
- Liquidate investments.
- Delay payments to vendors. This strategy is commonly
followed in the corporate sector. Nonprofits are often
reluctant to delay payments for fear of damaging the public
trust or disappointing the vendor, who may be another small
business person in the neighborhood. When you must delay
payments to vendors, it is often advisable to explain the
situation to them carefully, and let them know when they
will be paid and how much will each payment be. You may even
consider alerting vendors that bills incurred at certain
times of year will always be paid. For example, you may
experience a cash flow shortfall during the summer. You
could negotiate up front with vendors that bills will be
paid within thirty days during most of the year, but within
ninety days during the summer.
- Taking Advantage of a Projected Temporary Cash Surplus
To take advantage of a projected temporary cash surplus, your
organization may:
- Make short term investments in certificates of deposit,
money market funds, or U.S. Treasury Bonds.
- Buy supplies on sale that you will use over the course
of the year.
In addition to reviewing your organization's revenue and
expense budget, the board should review the organization's cash
flow budget. The review should also include any measures related
to managing cash flow which involve commitments on the part of
your organization such as loans or revised terms with vendors.
The Helpful Organization: Sample Cash Flow
Budget
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Total
Budget
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January
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February
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March
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April
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May
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June
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EXPECTED
REVENUES
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Government
Grants
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$35,000
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12,000
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4,000
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16,000
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Foundation
Grants
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50,000
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5,000
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7,500
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15,000
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Individuals
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12,000
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1,500
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30,000
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Fees for
Service
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55,000
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3,000
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4,500
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4,500
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5,000
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5,000
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3,000
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Total
Revenue
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152,000
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3,000
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9,500
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6,000
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24,500
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24,000
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49,000
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EXPECTED
REVENUES
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Salaries &
Fringe Benefits
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Executive
Director
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38,000
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3,167
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3,167
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3,167
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3,167
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3,167
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3,167
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Program
Directors
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50,000
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4,167
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4,167
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4,167
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4,167
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4,167
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4,167
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Secretary
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27,000
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2,250
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2,250
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2,250
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2,250
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2,250
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2,250
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Rent
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12,000
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1,000
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1,000
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1,000
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1,000
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1,000
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1,000
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Supplies
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11,000
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5,000
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6,000
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Telephone
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3,300
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300
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250
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300
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500
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350
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250
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Postage
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2,500
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150
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150
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150
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1,500
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150
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150
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Copying
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2,950
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100
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100
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100
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1,000
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100
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100
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Total
Expenses
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146,750
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16,134
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11,084
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11,134
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13,584
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11,184
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17,084
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NET INCOME
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5,250
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<13,134>
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<1,584>
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<5,134>
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10,916
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12,816
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31,916
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Cash on Hand -
Beginning
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2,648
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2,648
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<10,486>
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<12,070>
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<17,204>
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<6,288>
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6,528
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Ending Cash
Available(Before Loan Activity)
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7,898
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<10,486>
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<12,070>
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<17,204>
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<6,288>
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6,528
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38,444
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Loan
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0
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12,000
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0
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6,000
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<10,000>
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<8,000>
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0
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Cash After Loan
Activity
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7,898
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1,514
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<70>
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796
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1,712
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6,528
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38,444 |
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