When it comes to managing finances, most nonprofits climb a consistent ladder of sophistication. Hopefully, they move quickly through the lower rungs.
Rung 1: The current checking account balance.
Information provided: DId we bounce a check today?
Typical comments: “Whew!” or “Oh, NO!”
Rung 2: The current checking account balance, including outstanding checks.
Information provided: Will we bounce a check in the next few days?
Typical comments: “Whew!” or “Let’s cover that quickly!”
Rung 3: Year-to-Date Income compared to Expenses showing a profit (surplus) or loss
Information provided: Have we gained or lost money this year?.
Typical Comments: “It’s June and we are showing a loss. Stop everything! Lay off staff! Start an emergency plea for donations!” ” ‘Donations always fall off in the summer.’ ‘But this much?’ “I don’t know, but they always get better at the end of the year. Trust me.'”
Note: I have seen multi-million dollar nonprofits run at this level, and it was tough to get them off this level.
Rung 4: Year-to-Date Income, Expense, Net showing a percent of the full-year budget.
Information provided: Are we ahead or behind a straight line budget in income, expense, or net?
Typical Comments: ” ‘Donations always fall off in the summer.’ ‘But this much?’ “I don’t know, but they always get better at the end of the year. Trust me.'” “Aren’t our utilities higher in winter?” “Our banquet in April raised a lot of cash.”
Note: No budget should ever be straight lined, unless every line item is fixed at the start of the year and never varies by month.
Rung 5: Year-to-Date Income, Expense, and Net showing budget amount remaining.
Information provided: We still have money left to spend.
Typical Comments: “Let’s spend it quickly.” “Is this normal at this time of year? I don’t know.” “We are planning a big donor push in December.”
Rung 6: Income, Expense, and Net compared to last year.
Information provided: Last year was different.
Typical Comments: “Yes, it was different. We held the special event later last year.” “July had a different number of paydays last year.” “Last year…”
Note: It’s really hard to get some people off this level. Yes, this information is necessary for preparing a calendarized budget for next year, but you only do that once per year. Other than that, it is a total waste of time.
Rung 7: Income, Expense, and Net compared to the calendarized budget.
Information provided: Are we doing what we planned to do? How have we funded variances? How have variances impacted us?
Typical Comments: “Now I see where we stand.” “How does this impact the rest of the year?” “Are these variances due to timing, or will they stick for the whole year?” “So what?”
Note: We are getting closer. We have answered the first of the two big questions: “Are we doing what we planned to do?”
Rung 8: Income, Expense, and Net compared to the calendarized budget, with full-year projections.
Information provided: Are we doing what we planned to do? How have we funded variances? How have variances impacted us?
Typical comments: “Now we know where we stand, with respect to both finances and performance plan. We know where to look for good news and bad news. We know how good is the good news and how bad is the bad news. And, most importantly, we have answered the second of the two big questions: ‘How does this impact the remainder of the year.”
Yes, this post has focused on operational cash management. Proper financial management has a lot more than this, but this is a firm foundation.