Effectively managing cash flow for any company — large or small, established or just starting out — is one of the most critical aspects of running a business. For a nonprofit organization, it’s even more crucial as a cash flow mistake can paralyze a not-for-profit company and raise concerns among contributors and recipients, impacting the brand and support of the organization.
Cash flow, in its simplest term, is the amount of available cash an organization has access to at any point of time. This cash regularly flows into the organization through donations and flows out when paying for operation expenses, annual events, etc. Cash flow is distinctly different from profitability — a nonprofit can lose money for a year or two and stay in business, but if a nonprofit runs out of cash flow and can’t pay charity recipients, make payroll or obtain additional donations, it could be in trouble.
Many companies, both nonprofit and for-profit alike, often make cash flow mistakes at one time or another and some can be devastating to their success. No matter how logical your organization is about finances, cash flow mistakes do occur and the speed at which you can realign that cash flow can make all the difference. With the following tips and recommendations, a nonprofit organization can get its cash flow back on track.
Consider All Revenue Avenues
Many nonprofits don’t use every possible avenue to generate additional revenue and build their assets. This is largely because an organization’s operators don’t think they have the staff or the resources to do so. In reality, board members can often play a greater role in increasing donations. Nonprofits should also consider turning to other agencies for additional resources and support.
An organization may also be too narrowly focused on how they raise donations and capital. Many get stuck in a rut using one tried-and-true avenue and rely too heavily on the same donations and resources each year. There’s an increasing number of opportunities to expand into new donation sources and avenues to promote your cause. Leveraging online resources such as the Foundation Center, which lists hundreds of grants and foundations that nonprofits can connect with, can help an organization tap into new grant sources and opportunities.
Nonprofits need to expand their circle and outlets for resources, looking into new grants or tapping additional resources, such as a fresh group of supporters. By thinking creatively, nonprofits can align themselves with new corporate sponsors and large organizations that have people and causes similar to theirs.
Too often, nonprofits are focused on short-term gains and forget to plan for the future. They don’t budget contributions from a long-term pool of assets like an endowment or foundation, which can be great resources for long-term gain. They neglect to seek out larger, one-time gifts to launch an endowment or expand an existing one, resulting in a lost opportunity for revenue.
They may also miss out on taking advantage of cash investments that are simple with better returns, even in a short-term. For example, using CDs to ladder cash flow for a year or two can bring in some additional income to the nonprofit.
Strategies and ideas for long-term gain are readily available for nonprofits if the organization’s management is willing to learn more about alternative strategies that balance the risk and reward of each plan.
We have also seen a number of nonprofits lacking in the diversification of their existing assets. Often times, an organization’s assets are too concentrated in stocks and bonds, where financial returns are volatile and unpredictable. In a market where a traditional allocation of stocks, bonds and cash may no longer be the ideal approach for pursuing an organization’s financial goals, smaller nonprofits can employ more diversified strategies and invest in additional asset classes.
New products are now available that provide access to additional investment options, including real estate assets, commodities and alternative strategies. In particular, nonprofits can access these alternatives through the use of mutual funds and exchange-traded funds (ETFs). Having a diversified portfolio also has the potential to enhance returns.
The Right Recognition
Nonprofit organizations sometimes lose sight of what really motivates their followers and supporters to donate and support their cause. They are often too caught up in trying to build their resources that they forget what really brought an individual to their cause in the first place.
By taking the time to reevaluate and truly understand why supporters are offering their donations and time, a nonprofit will uncover the motivating factors that can lead to even more engagement with their followers. They can build, develop and nurture a donation program that is impactful and focused on the effect that followers offer the cause.
They should also acknowledge and thank their supporters often, utilizing appropriate recognition tools. This could be a personalized thank you card sent to each donor, a personalized plaque for a certain dollar amount donated or recognition in an annual report. Recognition should be genuine and authentic, fitting the culture of the nonprofit and tailored to its individual donors.
Nonprofits that can better connect with their target audience and supporters will raise more capital and create a strong long-term partnership with donors. This will help keep cash flow running smoothly, while making the business strong and impactful.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. Investing involves risk including the potential loss of principal. No strategy can assure success or protects against loss. Asset allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.