Cash flow control is a fundamental aspect of ensuring the success and longevity of nonprofits. By having an error-free cash flow statement, managers and financial professionals can gain meaningful insights into their financial health, allowing them to plan effectively, meet their commitments, and sustain their operations. Let’s discuss this document in detail and how it fits into the overall picture of financial reporting.

Understanding the Cash Flow Statement

A nonprofit cash flow statement is a financial document demonstrating an NPO’s money inflows and outflows for a selected interval, such as a month, three months, or a year. The primary task of developing such a document is to provide data on sources of revenue and where the organization’s money goes.

The statement of money flows includes several chapters:

  • Operating activities. This portion identifies cash flows connected with daily operating performance, including membership dues, payroll, standard earnings, capital-raising activities, and utility bills.
  • Investment activities. Such a chapter includes the movement of funds that enter and exit the organization for investment. Here, we deal with shares, bonds, and other assets. Such activities may include earnings from purchasing and selling investments, dividends, and interest revenue.
  • Financial activities. This part demonstrates the impact of selling fixed assets, collecting accounts receivable, and borrowing from other entities on your money flow.

Together, these three elements create a complete grasp of your organization’s daily financial activities. The document also demonstrates the organization’s liquidity or financial ability to pay its short-term debts.

Preparing a Cash Flow Statement

If you decide to fulfill NPO’s financial reports independently, you’ll be glad to hear that preparing a cash flow statement is not that difficult. However, you should consider this procedure step by step.

  • Change in net assets. First, identify how funds have changed over the selected interval (one month, three months, or a year). These data are indicated in the report on the nonprofit organization’s activities. Identify all changes in equity as they affect the entity’s respective asset and liability accounts.
  • Calculation of financial assets from investment activities. Add or deduct capital inflows and outflows resulting from such activities. Thus, purchasing a new machine is an outflow of capital, while selling property is an inflow of money.
  • Calculation of cash flows from financial activities. Add or deduct cash inflows and outflows from such activities. So, you may add the capital obtained on the loan and deduct the credit repayment.
  • Balance at the end of the interval. In the final stage, the cash flow from operating, investing, and financing activities must be added up. The ending balance demonstrates how your net cash has increased or decreased over the selected interval.

You may manually prepare a financial report using pencil and paper or Microsoft Excel and financial templates. However, we recommend implementing special accounting software to generate monthly reports. Using such an application is a more accurate option since the report collects data entered during daily performance.

Analyzing Cash Flow Statements

Now that you have studied the crucial components of financial statements for nonprofits, you must realize how to analyze them. This document is vital to estimate your NPO’s financial position. Ideally, you want positive cash flow, as this demonstrates that your organization has enough savings to fund its operations and repay its loans. The negative parameter is not always bad, as it can prove that your business has invested a large sum in a promising investment project.

Cash flow troubles may arise due to donation intervals. Experts remind us that the maximum money inflow can be observed at a particular interval, e.g., during the annual fundraising. It may cause difficulties in monitoring cash flow at a specific moment. Simultaneously, utilizing a nonprofit cash flow statement allows you to make a rational decision.

Nonprofit Cash Flow Statement: A Comprehensive Guide

Best Practices for Cash Flow Management

Poor financial management and lack of money can cripple an NPO, prevent it from meeting its financial obligations, and lead to closure. To prevent this, entities must control the inflow and outflow of capital and take measures to decrease deficits. Let’s look at how you can improve your cash flow parameters with financial transparency.

  • Accurate record-keeping. Carefully track annual revenue and expenditures to ensure you have sufficient money to meet your liabilities and understand your money flows and resources. Accurate accounting records allow you to fulfill various reports on the organization’s activities, including the statement of cash flows for nonprofits. Such data can later be utilized to define areas with overspending to reduce these problem sectors and handle the inflow and outflow of funds.
  • Implement effective budgeting techniques. Proactive budgeting and forecasting tools allow a nonprofit to predict money inflows and outflows accurately. By developing detailed reports that align with nonprofit goals and regularly monitoring financial indicators, NPOs can define potential capital issues and quickly adjust strategies.
  • Create an emergency fund to cover expenditures. A reserve fund is a savings account from which an organization can draw funds when necessary. It will help the organization cover unexpected expenditures or take advantage of promising opportunities if required. In addition, having a reserve fund will help the NPO weather a financial downturn. If donations decrease during a stagnation, the nonprofit still has access to savings to pay wages to workers and keep the institution running.

One of an NPO’s leading priorities is handling money moving into and out of the entity in the long term. Rational cash flow management requires precise and timely accounting.

Common Challenges and Solutions

Financial managers of NPOs face considerable troubles when managing revenue and expenditures. Let’s examine their main problems.

  • Dealing with irregular funding. Nonprofit organizations use various funding channels, including donations, grants, and capital-raising events. Such financing is inherently unstable, with sharp peaks and valleys depending on economic conjuncture and donor priorities. It creates trouble in financial analysis and operations maintenance. To withstand such volatility, it is necessary to diversify revenue sources, e.g., goods sales or corporate partnerships.
  • Managing expenditures during low cash flow periods. Nonprofit organizations often operate on tight budgets. They have to make difficult choices about where to allocate capital, leaving critical needs often hanging in the balance. Limited resources may restrict technical upgrades, personnel development, and financial structure investment. Over time, this will impact the nonprofit’s performance and sustainability. To overcome such a problem, NPOs may consider collaborating and sharing resources with other organizations. It could be co-programming, leasing an office, or joining forces to raise capital.

Today’s NPOs must learn to navigate economic uncertainty, changing regulations, and limited resources while working on their core mission of sharing their business with the community. Effective financial consulting will help you overcome any difficulties.

Final Words

Knowledge of how to read and interpret a nonprofit cash flow statement provides a precise estimation of the NPO’s financial management and condition. By analyzing cash inflows and outflows and following the recommendations described above, you may define potential troubles and provide financial decision-making regarding your NPO’s performance, investment, and financing.

If you need help with your cash statement and outsourced CFO services, we recommend contacting BooksTime accountants. Our skilled accounting professionals can help your nonprofit create accurate reports and interpret the results correctly. We will also guide you on how to ensure your organization’s financial health.