What is cash management?

Cash management is the process of collecting, handling, and using cash. Additionally, it involves assessing liquidity, cash flow and investments.

Why is it important?

• Cash management:
  • Ensures that an organization has sufficient cash on hand to sustain business operations
  • Helps an organization anticipate and plan for large cash needs, such as startup costs for a new program or delayed payment for reimbursement-based contracts 
  • Increases an enterprise’s ability to weather unpredictable downturns in sales  
  • Clarifies how revenue translates to cash and highlights any issues with aging accounts receivable or delinquent invoices 

Best practices   

Monitor cash reserves

• Use accounting software to stay up to date on how much cash you have on hand. Regularly review cash reserves during leadership meetings to ensure there is a healthy bank balance.

Create a cash flow projection

• Once you have developed your annual budget, create a twelve-month cash flow projection to map out the timing of when you expect cash to flow in and out of your organization each month. This will forecast your cash balance throughout the year – pinpointing months when you may spend more cash than you receive and calculating how much working capital you would need to manage these times. 
• When building a cash flow projection, make sure to:
  • Use realistic assumptions from your current budget, and review last year’s checkbook, receipts, and disbursements to understand historical cash flow timing and amounts. Determine whether any significant cash outflows are likely to reoccur on an annual or monthly basis. 
  • Be conservative when estimating your cash flow; for example, it is unrealistic to assume that all customers will pay invoices on time.
  • Keep an accurate count of the number of weeks in each month (particularly important if you have a biweekly payroll schedule!).
  • Nonprofits should be careful not to commingle restricted cash with operating cash.
  • Check out this cash flow projection tool and user guide from the Nonprofit Finance Fund.  

Regularly track and update cash flow projections

• It is important to carefully monitor your cash flow since it is easier to address expected shortfalls when alerted early on. Revise projections regularly to compare your forecasts to actual figures and review the variances.

Consider strategies for managing cash flow

• Draw on any existing cash reserves built from annual surpluses. Keep reading below for guidance on growing your operating reserves.
• Increase inventory turnover to generate consistent cash flows.
• Tighten your accounts receivable collection process by streamlining (and potentially automating) invoicing and payment, considering shorter payment terms, and developing proactive collection procedures that prioritize delinquent accounts. Look into factoring (the selling of invoices to a third party) if a high accounts receivable balance is driving insufficient cash on hand.
• Try to minimize expenses to control spending. Speak with your vendors to see if there are flexible financing options to distribute the cash impact of purchases.
• Explore whether short-term debt would be a suitable funding source for your organization. If appropriate, consider applying for a line of credit (to address temporary cash shortfalls between disbursement and receipt of cash), or a bridge loan (to cover expenses until a specific source of funds is received).

Grow your cash reserves and consider developing a formal operating reserve fund policy 

• Aim to build and maintain a cash reserve of at least three months of operating expenses to provide a safety net against any unforeseen fluctuations in revenue. As your organization generates unrestricted cash surpluses over time, designate a portion as a reserve fund.
• Working with your board and leadership team, you may want to create a reserve fund policy that articulates the fund’s objectives, target minimum amount, strategy for building the fund, investment options, replenishment plan, and requirements and controls. Learn how to develop an operating reserve fund policy and check out sample policy templates.