Have you considered that your chronic cash flow problems may be a result of a malfunctioning budget process? You may suspect foul play, but most of the time it comes down to two issues: 1) not properly planning the activities of the year with a well-thought out budget and 2) not monitoring actual results in comparison with the budget. In our experience, this is usually the root of the cash flow problems.
Cash flow problems can result from money that is owed to your organization (receivables) that is not paid timely or expenses that are laid out ahead of the matching revenue (such as with an upcoming conference). But these situations are usually clear to see, easy to prepare for, and usually short-lived. When an organization has chronic cash flow problems, the root may be the lack of proper planning and monitoring.
When you take time to carefully plan the revenue and expenses that your organization will incur in the next year, you are considering realistic scenarios, setting goals, and planning for the largest expense you are likely to have – personnel. If the numbers do not fit, as in having an unplanned deficit, you need to make difficult decisions before the year begins. This sets you in a position of control. When you monitor the planned activity to the actual results (through budget to actual comparisons) you are controlling the situation further by making decisions during the year based on the results of the budget-to-actual.
Financial results tend to come in “waves”. The results of a poor financial decision made today may not be felt immediately. Chronic cash flow problems usually result from lack of proper planning and lack of control over the results. The wave effect continues until the root cause is addressed. To understand the effects of these waves, we recommend that you create and monitor a cash flow budget for the year. This cash flow budget is created from the organization’s annual budget.
We’ve had clients whose planning drilled down to each grant. Upon close inspection, the grants were being overspent, and those expenses were eating into the admin budget. In other cases, grants were being underspent, leaving money on the table. In most cases, the biggest expense was personnel, so controlling the amount of time that employees spend on the grant made a great impact on the fulfillment of the budget and therefore, the organization’s cash flow.
Preventing cash flow problems requires a multi-step approach:
- Create a well-thought-out budget for the fiscal year.
- Create a cash flow projection based on that budget.
- Monitor both the budget and the cash flow projection.
- Anticipate and mitigate cash flow dips.
- With this information, make timely, well informed decisions that will maintain financial health.
When a new client comes to talk to us about controlling their cash flow situation and we discuss their budgeting process, we always get a nod of agreement that the planning piece has been missing. Get ahead of this problem by implementing the ideas above.