Cash Forecasting Do You Need It
Running a nonprofit organization takes passion and talent, but there’s more to building a successful organization than willpower. Nonprofit organizations exist to fulfill a mission, serve a purpose, and reach as many members, communities, or individuals as they can. To serve and grow, nonprofit leaders must look forward to the future. That’s where cash forecasting can help. Creating a cash forecasting process at your organization can help you plan for the future while efficiently managing cash flows today.
What is cash forecasting?
A cash forecast tells the organization how much money is on hand right now and gives insight into the movement of that cash balance in future periods. A detailed cash forecast will highlight any cash shortages or surpluses that may be coming up in future months, allowing leaders to quickly assess contribution needs and future performance indicators. As each month closes, the cash forecast is updated with historical actuals as well as any changes to the budgeted revenues and expenses in future periods. The cash forecast gives a summary of how each financial transaction that has happened or is expected to happen affects the current account balances.
Do you need it?
A nonprofit does not officially need to have a cash forecast, but if you want to manage cash more efficiently and save your organization time and money then you absolutely need a cash forecast. Frequently updating and analyzing a cash forecast can benefit your organization by:
Giving leadership ample notice of upcoming cash shortages
Isolating budget variances before year-end
Tracks projected net income to comply with tax-exempt requirements
Eases decision-making about taking on new projects and programs
Identify delayed grant funding or unrecorded restricted funds
Key Takeaway: 4 tips for creating a cash forecast
To have an efficient cash forecasting procedure, your nonprofit must have an effective and realistic operating budget. The details on the budget are used to fill in future income expectations and upcoming expenses and costs on the cash forecast. Then as the forecast is updated with actuals when the accounting period closes, future cash needs can be noted months in advance.
Start with an income statement and a budget
Use the most recent income statement and the current year’s operating budget to create your cash forecast. The forecast will look like a trailing 12 income statement or cash flow report, with each month’s revenues and expenses recorded. Budgeted figures will be updated once they occur, and cash totals will be tied to the organization’s bank account monthly.
Pro tip: The accounting software you’re using in-house or through your accounting service may already have a function to cash forecast set up, which can save a lot of time.
Create separate projections for multiple grant programs
Managing cash in an organization that works with multiple grants can be challenging. If your organization works with restricted funds from one or more grants, consider creating multiple cash forecasts. Most grant applications require that a program or project budget is submitted before funding is approved, so it makes sense that the awarded funds should be tracked separately.
Customize the focus
The best method for cash forecasting at your nonprofit is the one that works with your unique operations. If you run a large organization, or a small one with simple accounting needs, consider focusing on one fluctuating area in your forecast. That area may be a single location, program, or grant cycle. It is not required to forecast all ordinary expenses and revenues, but it is helpful if you plan to project an accurate cash balance.
Ask for help
The financial aspect of a nonprofit organization can be overwhelming to even the most seasoned accounting team. If you are noticing reoccurring variances in your bank balance or can’t confidently project the cash balance three months from now, it’s okay to call in the experts. Turning to a professional accountant that specializes in nonprofits, like Financially Tone, is a more cost-effective action than allowing your team to get behind.
