As 2023 begins many nonprofit leaders are facing the reality of operating after the government funds that were provided during the pandemic have dried up. Organizations that regularly operate with minimal or moderate budgets are finding that they are in a cash negative position. How they respond now will determine what the future holds for their missions, staff, and the people they serve.
If this describes your nonprofit, find out more about what you can do to increase cash flow to keep your organization’s programs and initiatives running as intended:
Understanding Cash Deficits
For a nonprofit, a cash deficit occurs when its expenses exceed its revenue. This is a simple concept with a simple sounding solution – either increase revenue or reduce expenses. However, in practice it can be far trickier to fix.
Unlike a for-profit company, which can focus its strategy on selling more or increasing profitability to remedy their cash situation, nonprofits typically need to rely on other ways to fix their cash positions. Sure, some nonprofit organizations have a retail component that they can tap to sell more memberships, subscriptions, or products. However, organizations that do not have this option will need to increase donations and/or receive more private and public grants to get them out of a deficit and into a cash surplus.
And while nonprofit expenses, much like for-profit business expenses, are incurred to keep the organization running, reducing them can be difficult without compromising the mission. A nonprofit will have functional, operational, administrative, and development expenses as well as fixed and variable costs. Typically, nonprofit functional expenses will make up the largest portion of an organization’s costs. These include:
- Program service expenses
- Management and general (M&G) expenses
- Fundraising expenses
As a result, cutting functional costs indiscriminately can have an unintended effect on program offerings as well as fundraising results, moving the organization in the wrong direction with respect to its cash position. So, which expenses should you focus your efforts on if you need to pare down to improve cash flow? It depends on the type of deficit you are facing.
Identifying the Type of Deficit
Once you have discovered that you have a cash deficit (or are projected to have one in a future reporting period), it is important to identify what kind of deficit it is to understand what to do next. Nonprofit Hub identifies three types of cash deficits for nonprofits:
- One-time deficits
- Recurring deficits
- Residual deficits
A one-time deficit is an unexpected deficit that occurs just once and results from a large sudden expense. This kind of deficit can cause a financial hit but is likely able to be absorbed over time without a lasting impact on the organization.
A recurring deficit, however, is a deficit that keeps occurring. This is a more serious problem because it indicates that there is some sort of fundamental mismatch between the organization’s revenue and expenses. Recurring deficits are symptoms of bigger problems, requiring that they be evaluated and resolved before they occur again.
Whether a deficit is a one-time deficit or a recurring deficit, if it lasts longer than expected it then becomes a residual deficit. Where a residual deficit is occurring, strong financial leadership will be needed to fix the problem before the organization goes under.
Resolving a Deficit
The type of deficit and unique characteristics of the organization itself will determine how best to address it. Some ways to fix a nonprofit cash deficit are to:
- Eliminate non-essential costs and budget waste
- Reduce operating expenses
- Ask donors to un-restrict restricted funds
- Hold a special fundraiser or increase overall fundraising efforts
- Cancel underperforming fundraisers
- Ask for major donors to match contributions
- Look for ways to monetize virtual connections (social media, email subscribers, etc.)
- Apply for a loan or line of credit
- Change the timing on recurring expenses
- Restructure the organization
- Strengthen your organizational culture to better retain employees
- Regularly report on financial metrics to support cash flow management efforts
- Set aside cash in an emergency fund during times of surpluses
Your financial leadership should be able to advise on which strategy or combination of strategies is going to be best suited to combat your specific deficit. If you do not have a dedicated CFO or Director of Finance and your ED or CEO does not have the time or financial acumen to lead the organization through a deficit, consider hiring a fractional nonprofit CFO to provide the expertise needed to keep the organization moving forward.
Using Cash Flow Projections for Smarter Budgeting
Before you experience another deficit, get a better handle on your cash flow so you can properly time and budget for hiring expenses, program costs, and fundraising expenses.
Doing cash flow projections allows nonprofits to understand what is coming in and going out before a surplus or deficit occurs. Accurate nonprofit cash projections rely on anticipated income and expenses to forecast what the future may hold for the organization, which makes them an instrumental tool in any organization’s strategic planning. As our team explains:
“Cash flow projections for nonprofits are just as important as cash flow projections in the corporate world, maybe even more so! Why? Nonprofit organizations are less likely to have a steady stream of income than their for-profit counterparts. Without a predictable income each month, many nonprofits bounce back and forth between deficits and surpluses, making the day-to-day management of the organization as well as strategic planning more difficult. Cash flow projections provide the key information needed to spend wisely during times of deficits as well as surpluses. The result is a stronger organization that is better able to serve its community and further its mission.”
If you need help managing your nonprofit’s financial position, please reach out to us. We have a team of trusted CFOs with experience in the nonprofit sector to help you resolve a cash deficit and engage in better strategic financial planning for the long-term.