5 cash management best practices nonprofits should follow

It’s a simple concept on paper: nonprofits must maintain healthy cash flows to sustain their operations, fulfill their missions, and achieve long-term stability. However, unpredictable capital markets, fluctuating revenue streams, onerous compliance requirements, and fund restrictions can complicate matters for executive directors and financial officers.

We’ve had the privilege of working with Los Angeles’ nonprofit community for more than 30 years. In that time, we’ve focused on learning many best practices that organizations can follow—and pitfalls to avoid—when formalizing an effective cash flow management strategy.

This guide outlines best practices for maintaining good financial health, optimizing cash flow, and leveraging technology for better financial oversight.

Tip 1: Develop Accurate Cash Flow Forecasts and Monitor Regularly

Cash flow management begins with forecasting. By developing detailed cash flow forecasts, nonprofits can anticipate future financial needs and potential shortfalls.

This foresight allows organizations to plan ahead, whether by securing additional funding or adjusting current expenses. When creating forecasts, consider historical data and trends, seasonal fluctuations in donations and program costs, upcoming fundraising events or campaigns, expected grant disbursements, and anticipated major expenses.

After forecasted assumptions are created, monitor the cash flows consistently. This practice allows organizations to quickly identify potential issues and take corrective actions before they escalate into major problems. Consider implementing a bi-weekly flash report that tracks high-level revenue, payroll, and operational spending. This overview provides a snapshot of the organization’s financial health, provides data to track overtime, and helps leadership make informed decisions

Tip 2: Diversify Revenue Streams and Optimize Fundraising Strategies

Relying on a single source of revenue can put a nonprofit at significant risk if that source dries up. Diversifying revenue streams is key to stabilizing cash flow and reducing the risk of shortages.

Some ways nonprofits can diversify their revenue include:

• Expanding fundraising efforts to reach new donor demographics
• Exploring grant opportunities from various foundations and government agencies
• Developing income streams through experiences or products offered to core supporters
• Implementing membership programs for recurring revenue
• Seeking corporate sponsorships with companies that have similar missions

To optimize your fundraising campaigns, we recommend the following tactics:

• Utilize data analytics to target and engage donors more effectively
• Explore digital fundraising channels to reach a wider audience
• Schedule fundraising campaigns strategically throughout the year
• Personalize donor communications to build stronger relationships

Tip 3: Optimize Cash Reserves and Working Capital while Understanding Restricted Funds

Having a cash reserve is crucial for nonprofits to weather unexpected financial challenges. Organizations should aim to set aside funds regularly to build up their reserves. While the ideal size of a cash reserve can vary depending on the organization’s size and needs, having at least three to six months of operating expenses in reserve is reasonable. A Registered Investment Advisor (RIA) like Westmount can provide detailed guidance on how to invest reserves conservatively and for liquidity.

Other strategies for optimizing working capital include:

• Accelerating the collection of receivables
• Maintaining optimal inventory levels
• Exploring short-term investment options for idle cash
• Automating payments to reduce errors and processing time

Restricted funds are funds that have been earmarked for a specific purpose, perhaps from a customized grant or donation. Nonprofits must ensure they understand the restrictions attached to these funds and manage them properly for investment and liquidity.

Tip 4: Manage Expenses Proactively with Prudent Budgeting

Effective cash flow management isn’t just about increasing income; it’s also about managing expenses wisely. Nonprofits should regularly review expenses and look for areas where costs can be reduced without compromising mission-critical activities.

Strategies for expense management include:

• Conducting regular expense audits to identify non-essential costs
• Negotiating favorable payment terms or charity discounts with vendors
• Exploring shared services or collaborative partnerships with other nonprofits, including office space
• Implementing energy-efficient practices to reduce utility costs
• Utilizing volunteers strategically to reduce staffing expenses

Nonprofits should also develop a detailed budget that aligns with their organizational goals and regularly monitor their financial performance against these budgets. Key aspects of efficient budgeting include:

• Creating realistic budgets based on historical data and future projections
• Breaking down budgets by program or department for better accountability
• Involving key stakeholders in the budgeting process
• Using budgeting software to streamline the process and improve accuracy

The Unified Chart of Accounts (UCOA) provides a useful framework for categorization by focusing on four broad statements:¹

• Statement of Activities: an overview of revenue, expenses, and net assets to form accurate year-by-year comparisons as well as project future years’ budgets.
• Statement of financial position: a balance sheet that depicts assets, liabilities, and net assets. This provides a snapshot of your organization’s financial health and is helpful in planning for growth.
• Statement of cash flows: a report showing the cash movement through the organization as it relates to operating, investing, and financing activities. Typically, this is a monthly report to track spending and fundraising on track throughout the year.
• Statement of functional expense: unique to non-profit organizations, this statement tracks expenditures with respect to administrative, programming, and fundraising activities so you can see how your spending furthers your mission.

Tip 5: Regularly Review Financial Policies and Leverage Technology

Finally, nonprofits should regularly review and update their financial policies and procedures. These policies form the foundation of effective financial management and should evolve as the organization grows.

Key financial policies to maintain include:

• Cash handling procedures
• Investment policies
• Expense approval processes
• Financial reporting standards
• Conflict of interest policies

Partnering with an experienced Registered Investment Advisor (RIA) can help keep these policies up-to-date and ensure all staff and board members are well informed.

Additionally, leveraging technology can significantly add value. Financial management software can provide real-time insights into an organization’s financial position, automate routine tasks, and generate detailed reports. RIAs can recommend solutions with non-profit-specific features for cash flow forecasting, donor management systems, grant-making software for tracking and reporting, and expense-management systems to streamline purchasing and reimbursements.

Next steps

Regardless of whether your organization is a private family foundation or public charity, proactive financial management is essential for nonprofit sustainability. By forecasting cash flow, diversifying revenue, controlling expenses, and leveraging technology, organizations can maintain a more predictable fiscal position.

To learn more about our work with nonprofits, call us at 310-556-2502 or email info@westmount.com to speak with an advisor.