Managing Your Money

WHY DOES YOUR ORGANIZATION NEED A MONEY MANAGEMENT PLAN?

If your organization is tiny, and its finances come from bake sales and occasional ten-dollar contributions – in other words, if your income and expenses are only one or two thousand dollars a year – you may not need a money management plan beyond keeping your checkbook balanced and paying your bills on time. But if there’s any complexity at all to your financial situation, a money management plan is necessary for several reasons.

  • It will enable you to continue to fulfill your purpose – i.e. make sure that there’s enough money to provide services, keep your initiative going… whatever it is your organization was founded to do.
  • It will help to ensure that you get the most out of your money. Good money management will stretch your dollars by helping you use them as effectively as possible.
  • It will make it possible to keep control of your finances, and particularly of your cash flow.
  • It will help you maintain good relationships with your landlord, your suppliers, and anyone else whom you pay for goods and services. Life is much easier when people and organizations pay their bills on time. Landlords and others are much more likely to make repairs, fill special orders, and generally be friendly to those who make their lives easier.
  • It will establish your credibility in the community. Your organization will get the reputation of one that takes care of business, and is serious about its financial commitments as well as its mission. This kind of reputation can add greatly to your fundraising success, since people want to put their money where they know it will be well-managed to do the most good.
  • It will save you time in dealing with money. You’ll spend far less time trying to track down a missing receipt, or redoing something because you didn’t do it right the first time, or engaging in other forms of waste motion.
  • It will save you a great deal of worry, because you’ll know exactly how much money you have and how it’s being spent.
  • It will give you more time to devote to the actual purposes of your organization. Money is a means for you to reach your goals. The more effectively your money is managed, the more effectively you’ll be able to use it.

WHAT DOES THE EVERYDAY MANAGEMENT OF YOUR MONEY INCLUDE?

Many directors of organizations, especially in such areas as human services, health, or education, find money management boring, or even frightening. They see it as all about math, and worry constantly about whether they understand algebra well enough to handle finances, or whether a simple error in addition will push their organizations over the edge. But good money management is actually about systems and decisions. The systems are the ones you set up to keep track of and actually handle your money. The decisions are those you make about where to get and what to do with your money. Whether and how well you set up those systems, and the information and assumptions you use in order to make your decisions – not your background as a theoretical mathematician – will determine how well your money gets managed.

If you really find handling money difficult, it may be possible to delegate the money management part of the organization to someone who has the desire and the skills to take it over. Large corporations almost always have a CFO (Chief Financial Officer) who deals with the financial side of the operation. If your organization has a large enough budget, or can find a volunteer who is both competent and reliable, you may be able to do the same. A word of caution, however: even in an organization where there is a CFO or other person who manages the money, it’s important that the director at least have a clear understanding of what’s going on, and know what questions to ask in order to be sure that money is being used properly.

This kind of financial help can come from within the organization, in the form of a Board treasurer or a Board member or volunteer who is an accountant. It can also be found through other organizations, such as SCORE (Service Corps of Retired Executives), whose members volunteer their professional services to non-profits and others in need.

Some systems you might want to put in place:

  • An accounting or bookkeeping system, that will enable you to get whatever financial information you need quickly and easily, and that will make any required reporting as easy and accurate as possible.
  • A banking system that affords the organization as much flexibility and as little cost as possible through the use of one or more accounts in one or more banks,
  • A money-handling system that clarifies who in the organization has the physical responsibility for various money-related tasks – making deposits and withdrawals, writing checks, paying bills, etc.
  • A petty cash system that makes it possible for staff to gain access to small amounts of money for purchasing everyday items: stamps, coffee, etc.
  • A payroll system that assures that everyone gets timely and accurate paychecks, with the proper fringe benefits, deductions, etc. included.
  • A payables and receivables system that defines the procedures you use to pay bills and to bill for the goods and services you provide.
  • A grants management system that allows you to keep track of the finances of each grant or contract separately, and to spend funders’ money in the ways you’ve agreed to.
  • A system for handling cash flow issues

“Cash flow” is a term you’ll see many times in this section. It refers to the actual flow of money through the organization, as opposed to what’s on paper. If you’re owed $500.00 by your friend, but he hasn’t paid you yet, and you only have $5.00 in the bank, that’s a cash flow issue. You can’t pay your electric bill with the fact that your friend owes you money. Organizations deal with this issue all the time. Money from grants and contracts often flows slowly, and fundraising is unpredictable. Bills, on the other hand, come regularly, and salaries have to be paid. How well your organization manages cash flow can make a tremendous difference in its health, financial and otherwise.

Some examples of decisions you need to make:

  • What kind of accounting system will you use, and will you computerize your accounting?
  • What types of bank accounts and banking are best for your organization?
  • Who has the authority to make day-to-day money decisions and to sign checks?
  • What constitutes full-time employment and what constitutes part-time? Who gets what kinds of benefits?
  • Will you use purchase orders for your ordering and buying? Which suppliers – for phone, office and program supplies, equipment, etc. – will you use?
  • Will you set up a separate bank account for each major grant? How will you handle reporting to funders?
  • Which bills and obligations will you settle first if you’re short of cash? How long will you wait before you borrow money?
  • What will you actually spend your money on?

Most organizations will find that if they think carefully about the decisions they make, and set up – and continually fine-tune, if necessary – systems that work for them, the math will usually take care of itself.

Another important aspect of money management lies in the attitude that goes into it. It is possible to be too concerned with money, and too careful about it. This kind of over-cautious attitude may lead to an unwillingness to take risks or to change, an attitude that can stultify an organization. By the same token, a too-casual attitude can lead to financial and even legal difficulties for the organization. It’s important to understand just how important money is to what you do, and also to realize that it’s not the only thing that’s important. Keeping a clear perspective is key to managing money rationally.

  • What does tax-exempt status have to do with money management?
  • How do you handle cash flow issues?
  • What are the day-to-day decisions and concerns you’ll face in carrying out a money management plan?
  • Investing extra money?

HOW DO YOU CREATE A MONEY MANAGEMENT PLAN?

Every organization needs a money management plan. The nature of that plan depends upon the size and scope of the organization’s finances, however. Much of the material in this section is admittedly geared toward organizations with five-figure or larger budgets. If your organization’s budget is only a few thousand – or a few hundred – dollars, your money management may consist of little more than a checkbook and a calculator. It is important to understand what kinds of systems may be needed, however. Small organizations often grow, and even if they don’t, they still have to manage their resources effectively in order to do their jobs. So if your organization is small, you may not need to use all, or even most, of the money management strategies described in this section. But you will need some of them, and understanding money management in a larger sense should help you to make the most of what you have.

ACCOUNTING

The discussion of accounting here is meant only to help you approach setting up an accounting system and some of the issues an organization must face in the process; none of the information about accounting in the Community Tool Box should substitute for conferring with an accountant or other financial professional.

If your budget is very small – only a few hundred or a few thousand dollars – you may not really need an accounting system at all; but you’ll still need to balance your checkbook, keep track of money in and money out, and pay attention to cash flow. A basic understanding of the issues here will still be necessary for you, even if your accounting system is no more than a check register and a stack of receipts in a desk drawer.

When setting up an accounting system, you will need to determine whether you will use a cash basis or accrual system to keep your books.

Cash basis/Modified cash basis accounting

Many small not-for-profits use cash-basis rather than accrual-basis accounting to record expenses and revenues. This means that they only record revenue when the cash is received, and only record expenses when they are paid. Some not-for-profits use modified cash-basis accounting, where they will record payroll taxes withheld from employees or large revenue or expense items on an accrual basis.

Accrual basis accounting

Accrual-basis accounting reports income when it is earned and expenses when they are incurred. Most businesses track all expenses and revenues using accrual accounting. If you get public money (and, quite possibly, even if you don’t), the accrual method is more accurate and more effective. It tracks line items better, and tells you how much of your annual budget you’ve actually spent. If you go purely on a cash basis, it’s a little like not recording the checks you write from your personal checkbook, but only checking the balance occasionally. Doing that, you can end up overdrawn with no trouble at all, since your balance rarely matches the amount you’ve actually recorded in your checkbook. If you use accrual, you always know when you can spend and when you can’t; it makes sense in that circumstance to keep track of cash as well, but not necessarily to keep books on a cash basis.

Another one of the most important elements of an accounting system is the working relationship between the organization’s accountant or bookkeeper and the rest of the staff. Words that mean one thing in common English mean something slightly – or radically – different in accounting language, and this situation can lead to massive confusion and incorrect or incomplete financial information. One nonprofit director struggled to get from his organization’s bookkeeper a statement of how much real money came in and went out in a particular year. It literally took years to determine that the bookkeeper meant something different by “cash” than the director did. Once the language problem had been solved, the information was easily obtainable.

This issue can cause errors in the other direction as well. An accountant or bookkeeper may not get the information she needs because of the language barrier, or because other staff members don’t perceive the bookkeeper’s requests as important, and, as a result, the books may not be accurate.

Yet another potential concern lies in the difference between nonprofit and for -profit enterprises. The bookkeeper in the anecdote above had never before worked in a nonprofit business, and therefore didn’t realize that it was important to stick to the budget. He didn’t understand why the director was so insistent on finding out where the organization’s income and expenses were in relation to what was projected. The result was frustration on all sides.

The bottom line here (pardon the pun) is that the relationship between the accountant or bookkeeper and the rest of the staff is incredibly important in determining whether an organization’s accounting system will work well or not. It is more than worth it to take the time to bring language and other differences out in the open, correct any misunderstandings, and clarify what’s necessary on both ends in order for the organization’s financial management to function smoothly.

BANKING

If your organization or initiative has a small budget – only a few thousand dollars – a single checking account may be all you need from your bank. But if your budget is large and complex, with a number of funders, you may need more than one account, or more than one kind of account, as well as some other services. Before you start looking for a bank, you need to decide what you want from your banking system.

Some of the possibilities include:

  • The best interest rates you can find, including interest on your checking account
  • The availability of high-interest accounts (Money Market, for instance) for times when you have extra cash that you expect to hold on to for a while
  • Overdraft protection (essentially a short-term loan up to a certain amount), so you can pay your bills when you’re short of cash
  • The willingness of the bank to loan your organization money if needed
  • A different – and perhaps even a different kind of – account for each of your major grants or contracts (Do you want these all in the same bank?)
  • Payroll direct deposit for employees
  • A banking package giving you favorable rates – your organization may be passing large sums through that bank every year, so consider what you should get in return

Other issues might include security (Are the bank’s deposits federally insured?), convenience (Is the bank close by? When is it open? How many ATM’s can you use without a fee?), how easy the bank’s services are to use, how the bank treats people from your organization, the bank’s relations with the community (Does it encourage small business development?), the bank’s philosophical stance regarding the issues your organization addresses (Does it lend to low-income and minority homebuyers, for example?), and personal relationships with bank officers.

You should shop for a bank the same way you’d shop for a car. Arrange an interview at each bank you’re interested in, explain what your needs are, and discuss how those needs can best be met by that particular bank. Pick the one you think can do the best job for your organization. If you carefully make decisions about what you need, and choose your bank equally carefully, you’ll come up with a banking system that’s right for your organization.

MONEY HANDLING

Having a banking system implies that someone has to be authorized to use it. Who in the organization has the authority to make final decisions about spending, and to sign checks and other financial documents, such as loan agreements or contracts? There are several ways to answer these questions, and the answers are different for different organizations.

Who makes financial decisions?

The answer here is usually the director, the Board of Directors, or some combination of the two. In many organizations, the director presents an annual budget to the Board for its approval, but, once the budget is approved, makes the day-to-day financial decisions without Board permission. If there are major deviations from the budget, the director comes back to the Board with a new budget, explains the changes, and has the new budget approved. This model is probably the most common among nonprofit organizations of all kinds. It allows for Board input and oversight through the budget process, but gives the director the freedom to make the decisions that go with her responsibility for the running of the organization.

In some organizations, the Board makes all financial decisions, and the director carries them out. In others, the director makes all financial decisions, and either no Board exists, or it has only a consulting role. This last model is unusual in larger organizations, where large sums of money are at stake.

There are other variations on all of these themes. Directors and Board finance committees or treasurers may share fiscal responsibility, Boards may hold veto power over directors’ decisions, or other officers – the accountant or chief fiscal officer (CFO), for instance – may hold decision-making power about money. The best advice about this issue is to choose a system that gives everyone the powers that go with his level of responsibility, and that allows him to carry out that responsibility as effectively as possible.

Who signs checks?

The person(s) designated to sign checks for the organization usually reflect who makes decisions about money. It makes sense to have at least two people able to sign checks (in case someone is sick or on vacation). In organizations where the financial decisions are shared between Board and director, a check may require the signatures of both the director and either the chair or the treasurer of the Board.

In some organizations, payroll and payables checks – or even all checks – are signed by the accountant or bookkeeper, rather than the director. In larger organizations, where there are several separate programs, the director of each program may have a separate account, and may be responsible for spending – and for reporting, both to the funder and to the organization’s accountant – for her program.

One standard procedure, often required by auditors, is that checks over a certain amount – usually several thousand dollars – be signed by two people, even if most checks get only one signature. This is to assure that large expenditures have been properly approved, and to keep someone from heading for Rio with the bank balance of the organization.

Who can use ATM cards and credit cards?

Who has access to the appropriate PIN numbers and cards? In most cases, these will be the people who make financial decisions and sign checks. Sometimes, however, convenience is also a factor: the bookkeeper or a staff member who lives across the street from the bank may be an obvious choice.

Who signs documents for the organization?

Most organizations choose an official signatory, the person whose signature commits the organization to a contract or other legal document. In most organizations, this is usually either the director or the chair of the Board, or, in some cases, both. As with check signing, who you choose as your organization’s signatory probably should reflect who makes the decisions about money and the organization’s functioning.

PETTY CASH

Petty cash is the money you keep in a drawer for when you realize there’s no aspirin in the office, or when someone needs paper towels. The amounts of money covered by petty cash are by definition tiny compared to the overall budget of the organization (you might easily spend less than $100.00 a year). If they’re not handled and recorded properly, however, they can drive bookkeepers and auditors insane. If your books are going to balance, you need a system to make sure that both who spent any petty cash and what they bought with it are recorded accurately.

One possibility is to simply start with a petty cash line in your budget. A certain amount of cash is drawn against this every month, and either distributed as needed, or distributed in set amounts to those who need petty cash. A way of reporting on spending is agreed upon by all concerned, and every expenditure gets recorded as soon as it’s made. As long as everyone follows the system, it all works fine. The reality is that petty cash is almost always a pain. The easier and simpler your system is, the more likely it is to be followed.

PAYROLL

Payroll is the largest expense for most non-profits. It may seem that no real system is necessary: after all, you just have to write out a check every week or two for the amount of an employee’s pay, right? Well… not exactly. There are a number of questions to answer before you make out and distribute your payroll.

  • How often does everyone get paid?
    • Most organizations pay either every two weeks (the most common) or every week, but some pay monthly or on some other schedule.
  • If the work year is less than 52 weeks, will you still pay on a 52-week schedule?
    • Most school systems and other educational organizations that take summers off pay their employees on a 52-week schedule, but other options are certainly possible.
  • How flexible are you willing to be?
    • Does everyone get the check on the same day regardless of whether that’s a work day for each person or not? Can employees decide individually on their yearly pay schedules?
  • How do you define full- and part-time, and how does that affect benefits?
    • Some organizations give everyone the same benefits, or a share of benefits, regardless of how many hours a week they work. Others don’t give benefits to part -time employees. Benefits are often denied to employees working fewer than 20 hours a week, and full-time is often defined as 30 hours a week or more
  • How will you handle benefits?
    • Will those who don’t need health insurance, for instance (because they get it through a spouse or some other source), be given the equivalent in some way? Will you hire a professional to prepare and administer a benefit program?

Remember that even if you don’t offer any benefits at all, you’re still responsible for paying – on a regular schedule – half of employees’ Social Security and Medicare taxes, as well as for withholding all relevant federal and state income tax. In most states, you’re also responsible for Unemployment and Workers’ Compensation. If you fail to pay any of these on time, you get hit with both interest and penalties (worst on the federal taxes). The IRS may not inform you of your error for a year or more, and they charge interest and penalties for that whole period, even though you may have had no idea that you owed them anything.

  • Will the organization do its own payroll?
    • Many banks and accountants offer regular payroll services, which may include direct deposit, mailing checks directly to employees’ homes, or other possibilities. One of the advantages of hiring out payroll is that the payroll service may take responsibility for errors in withholding, etc.
  • If the organization does its own payroll, will it use payroll software or some other check-writing system?
    • There are a number of payroll software programs on the market that include Social Security and Medicare taxes, and can easily be programmed to withhold appropriate amounts from each paycheck. They can also then print out the whole payroll – checks and records alike – saving a great deal of time. The drawback is the expense of both the software and the checks – specially printed and connected to be fed through a computer printer. Generally, the larger your organization, the more likely a software system is to be cost effective.
    • Check-writing systems – paper-and-pencil packages that allow you to make copies of checks and record payroll journals on the first writing, without having to resort to copiers or recording numbers by hand in two or three separate places – can be cost- and time-effective for some smaller organizations.

PAYABLES AND RECEIVABLES

Payables are those expenses which you owe, but haven’t paid yet. These include outstanding bills for goods you’ve bought, rent or mortgage payments, bills for last month’s utilities, bills for services you’ve already received, etc.

Receivables are those items of income that you’re owed for services or goods you’ve already supplied, or regular payments from funders which are due, but haven’t arrived yet.

If your accounting system is computerized, then your payables and receivables system essentially has to be. Some questions to think about while setting up a system to handle payables and receivables:

Payables:

  • Who actually pays the bills? The director? The bookkeeper?
  • When do bills get paid? As soon as they’re received or due, or simply on a regular basis (e.g. every two weeks, or once a month)?
  • Will you use a purchase-order system to buy things? Purchase orders are printed forms, numbered in sequence, on each of which you record a particular purchase. The seller gets a copy, and you keep one yourself, allowing you to track the things you’ve ordered or bought, and when and how much you’ve paid for them. Purchase orders provide a record for your organization of what it’s bought from – and what it owes to – whom, and they give the seller a record to bill from. Whether or not a purchase order system makes sense for your organization probably depends on how tight your fiscal controls are. Some accounting software can print out purchase orders automatically when you record an order, and make the process much easier.

Receivables:

  • Who actually sends out bills?
  • When does billing get done (or, in the case of grants, when do you apply to “draw down” – i.e. receive – money)? As soon as you’ve provided the goods or services, or simply on a regular basis (monthly, for instance)?
  • How long will you give people to pay, and how do you communicate with people whose payment is late?

GRANTS MANAGEMENT

If you receive grants or contracts, from public or private sources, they generally come with some clear expectations from the funder about what you’ll do with the money. A grant is a gift of money which you usually must agree to spend in particular ways. A contract pays you for goods or services you provide, generally after the fact (i.e. you supply the goods or do the work and then bill the funder for your costs at a rate you’ve both agreed upon).

In the case of public money – and, to a large extent, of private money as well – the greatest difference between grants and contracts can be when you get paid. With a grant, you generally receive money on a regular basis, or all at once, whether you’ve spent it yet or not. With a contract, you often don’t get any money until you’ve actually spent your own to provide goods or services. Many organizations would agree with an adult education provider who was asked the difference between a grant and a contract. He answered, “Life and death.”

There are advantages to contracts as well. Often, a contract gives you more control over how you can spend your money. And not all contracts require that you spend money before you can receive it; some call for money to be provided on a regular schedule, or allow it to be drawn in anticipation of services. But in general, the grant/contract distinction holds.

With most grants and contracts, the terms of how your organization can spend its money are laid out very specifically. The funder and the organization will agree on amounts for particular line items (a line item is an expense category, which occupies a single line in a budget: “salaries,” for instance, or “office supplies “). The funder then expects the organization to stick to these amounts, either exactly, or within specified limits (say, 10%). If the organization fails to fulfill its commitments without renegotiating the grant or contract (which is usually possible, at least within reasonable limits), it may be asked to return some or all of the money. It is therefore obviously crucial to be able to track each grant and make sure that spending is within the limits agreed upon, and that the called-for work or service is provided.

How will you track line items? The answer to this question can be complicated, because it often means juggling several different grant budgets. Your organization’s overall budget for office supplies may be $300.00, for example, but that may be divided among three different grants, with different amounts in each. Not only do you have to be careful not to spend more than the $300.00 you’ve budgeted, but you have to be careful to assign your spending to the right grants. If you have accounting software, it may be helpful here.

How will you track separate grants? One possibility is to keep a separate bank account for each grant or contract. While this is probably the most efficient way to handle the issue, in practice it’s often difficult because of cash flow. Keeping a separate set of accounting journals for each grant or contract is usually a much better option. With good accounting software, you can set up a system that will record your income and expenses by grant, and integrate them into the general ledger (the books of the organization as a whole) at the same time.

WHAT ISSUES ARE INVOLVED IN BEING TAX-EXEMPT?

Most non-profit organizations are tax-exempt, but tax-exempt status doesn’t come automatically. The organization has to first apply for and obtain non-profit status from the state, and then apply to the federal government for tax-exempt status. After federal tax-exempt status is granted, the organization can apply for a tax exemption from the state. Got that?

This discussion here of non-profit and tax-exempt status is primarily focused on the number of ways those issues can affect money management in your organization and make some demands on you if you want to take advantage of it.

First, there’s that matter of obtaining tax-exempt status in the first place. You’ll probably need to work with an attorney or CPA in order to fill out and submit the applications for non-profit and federal tax-exempt status. But once those are granted, your job isn’t over. There are still several things you have to do – some of them only once, and others continually – in order to make sure that you actually don’t pay any taxes (thus saving your organization a good bit of money, which you can then use to further your mission).

  • Apply for state tax-exempt status. This has to be done after you receive notice of your federal status, but you will need to supply copies of your federal tax exemption, your articles of incorporation (if you’re incorporated), your latest tax form, and some other information as well. While federal tax-exempt status excuses your organization from paying any income taxes, state status not only includes exemption from state income tax, but also covers sales tax, property tax, and any other state and local levies. State tax exemptions generally have to be renewed at regular intervals (every five years is common).
  • Make sure that the correct forms are used when purchases are made. In order to avoid sales tax, in most states an official representative of your organization must fill out and sign, at the time of purchase, a form provided by the state that specifies the amount of the purchase, the amount of the tax, etc. You also need a form if your organization sells to others. It is contingent on someone in the organization to make sure that whenever anyone buys or sells anything taxable for the organization, he has copies of the appropriate form signed by the appropriate person.
  • Remove taxes that you’ve been paying on your phone, utilities, and any other regular payments. The fact that you’ve received federal and state tax-exemptions doesn’t mean that everyone automatically takes the taxes off your bill. Getting the electric company, the gas company, the phone company and others to remove your taxes can be an annoying process. All of them require documentation, and it’s not unusual for each to require something different. It’s a pain, but your organization will save a good deal as a result.
  • Fill out tax formsEven though you have tax-exempt status, you still have to fill out forms for both the IRS and the state. The IRS form is the 990, and has to be filed just like a for -profit tax form. Furthermore, failing to file – or failing to file on time – incurs the same penalties as if you were a for-profit business. Many non-profits have their taxes done by a CPA as part of their yearly audit.
  • Arrange and undergo a yearly audit. An audit is the careful checking by a CPA, according to federal regulations, of an organization’s books. Any organization receiving public funds over $25,000.00 must undergo an annual audit of a certain type, and there are particular guidelines for non-profit audits in general. Among other things, such audits generally must confirm that any granted or contracted money was spent in the way agreed upon in the grant or contract, that Board meetings actually took place, and that the organization provided whatever services it said it was providing.

HOW DO YOU HANDLE CASH FLOW?

As explained above, cash flow has to do with the availability of cash at a given moment. The organization may be owed a great deal of money from funders and other sources, but if it doesn’t have cash in the bank, it can’t pay its bills. Community based and grass roots organizations deal with this problem constantly. While there’s almost no way to avoid it completely, there are ways to minimize it. The first step is to understand and anticipate why cash flow problems might arise for your organization.

CAUSES OF CASH FLOW PROBLEMS

There are numerous reasons that an organization may experience cash flow problems. The most common probably stem from late payments by funders. Some of the reasons that a promised grant or other payment hasn’t arrived yet might include:

  • The money hasn’t been released to the funder yet – this is particularly likely in the case of public money, which is subject to funding approval at a number of levels

In Massachusetts in 1999, for instance, the state budget wasn’t approved until November, five months after the June 30th end of the previous fiscal year. Until the budget was approved, no state agency could receive any funds from it, and the agencies’ grantees and contractors in turn could get no funds, either.

  • The funds are simply late – the funders are backed up, their computer system crashed, they’re understaffed, etc.
  • The funding is still in process. Perhaps you haven’t gotten the funder a crucial piece of information, or they’re still checking something in your proposal, or you’re still negotiating about particular line items – in any case, you won’t see any money until the process is completed.
  • You’re on a payment schedule, and the next payment isn’t due for another month
  • You applied for payment late (perhaps because your billing system is less than efficient)
  • You may be awaiting payment for services already performed, and for which your organization has already spent a lot of money
  • You may be waiting for revenues from a planned event – a carnival, a benefit concert – that hasn’t taken place yet
  • You may be waiting for a fundraising appeal or membership drive to take effect
  • You may simply not have enough money to do what you’re trying to do. If this is indeed the issue, it’s not really a cash flow problem, and you have some hard choices to make.

WAYS TO ADDRESS CASH FLOW PROBLEMS

While you may not be able to stave off cash flow problems altogether, there are number of things you can do to reduce their impact and prepare your organization to weather them.

  • Try to anticipate when cash flow problems may occur. Summer and early fall, when the state budget may still be in deliberation, could be a problem if you ‘re dependent on public funding, for instance. If you have a fundraising event or drive planned in September and another in May, March and April might be a time when you’re running short. Because of a difference in funders’ fiscal years, there may be a lull in funding at a particular point.
  • Set your priorities beforehand. What do you have to pay – or to buy – and what can you defer when you’re waiting for cash flow to catch up with your bills and obligations? All but the most necessary office supplies can probably wait until you have some cash. The phone company will usually continue your service as long as you make some payment – often as little as $10.00 – on your bill. Figuring out ahead of time what you have to pay or buy and what you can put off will both make it possible to get through shortages of cash and contribute greatly to your peace of mind.
  • Develop a cash flow contingency plan based on your priorities and the situation of your organization. Such a plan could include:
    • Negotiate beforehand with your major suppliers, utility companies, landlord, etc. to explain your situation and work out an arrangement that’s agreeable to both of you. If your landlord, for instance, understands that there are months when paying full rent will be difficult, she may be willing to take partial payment at those times, and wait for the rest until you have it. In general, informing your creditors beforehand of the possibility and negotiating some mutually acceptable arrangement will buy you both time and goodwill.

What do you pay first, and what do you put off if you can’t meet all your obligations because of cash flow? In almost all cases, payroll has to come first. The organization has an absolute obligation to its employees to maintain their livelihood if it possibly can. What comes next depends to a certain extent on who will let you slide how much. Landlords who rent to community based organizations are often sympathetic, for instance, whereas large utilities may not care who you are or what you do – they just want their money. At the same time, they want to keep you as a customer, and are usually willing to negotiate. It’s generally easiest to put off those who don’t provide goods or services upon which the life or death of your organization depends. There are ethical issues here as well, however: while the phone company won’t go broke if you don’t pay your bill on time, the local printer who produces your brochures might, even though he might also be more willing to wait for payment. What’s your ethical obligation here?

  • Arranging with your bank for short-term loans – at favorable rates, if possible – at the times you need them
  • Putting aside a certain amount of money whenever it’s available as a hedge against later cash flow problems
  • Making absolutely certain that you apply for as much of your funding as possible from each funder as soon as it’s allowable to do so

A temptation in a bad cash flow situation might be to put everything on a credit card, and take the benefit of the 30-day period before payment is due, or simply use the debt as a short-term loan. Remember before you take that route, however, that if you don’t pay within the specified time, you’ll be charged an exorbitant interest rate on your balance – usually 18% a year (you can get a much better deal on a short-term bank loan). Be aware also that different credit card contracts are different. Somewhere in the fine print in your credit card contract, it may mention that if you use your card to withdraw cash, every other purchase you make in that month from that moment will be charged interest at the maximum rate. Or there may be rules about what happens if you don’t pay your minimum balance on time. Make sure you know exactly what’s in your contract before you use a credit card to deal with cash flow problems.

WHAT ARE SOME DAY-TO-DAY MONEY MANAGEMENT ISSUES?

Once you’ve set up your systems and everything’s in place, you have to deal with the everyday tasks of actually using and keeping track of your money. Day-to-day handling of money, in addition to cash flow, involves the same kind of comparison shopping, looking for bargains, and negotiating for the best deals that careful families do. It also means maintaining your systems and making sure they’re actually being used. Having great software doesn’t help if no one enters the numbers, or if no one records them in the first place.

An important element of everyday money management that we won’t discuss in detail here is the building and sustaining of personal relationships between people in your organization and landlords, suppliers, customers, and funders. It’s always easier to negotiate, to get something done quickly, to get a break on a payment time, etc. if you have a personal relationship with the person you’re appealing to. It also makes doing business in general smoother and much more pleasant. The reality is that the world runs on personal relationships: the more and the better you can cultivate, the better for your organization and the simpler your financial management will be.

SHOPPING FOR GOODS AND SERVICES

You obviously want to make your money go as far as possible. One way to ensure that is by comparing the prices of different suppliers, and looking for the best deals on goods and services.

Some other things to consider:

  • Looking carefully at stores or service firms you might want to do business with, and comparing not only their prices, but what kind of support they offer, and exactly what you’re getting for the money. Cheapest is not always smartest.
  • Using catalogues. Sometimes, catalogues contain items that aren’t sold in stores, and may also feature specials, or simply be cheaper in general than store prices. With most catalogue orders, you have to figure in the extra shipping and handling fees; but some catalogue houses ship free if you order more than a certain amount. In addition, you can figure in the amount the organization saves by not having to pay someone to actually go out and shop.
  • Becoming part of a buying collaborative. Nonprofit organizations often band together – sometimes joining with larger entities, such as school systems or city governments – to negotiate large-volume deals with suppliers. You may be able to get office supplies, furniture, or other items at greatly reduced rates if you’re part of a group that orders these things in huge quantities.
  • Sharing equipment, positions and services. Two or more organizations may be able to save money by sharing a copier, a receptionist, or trash pickup.
  • Using the Internet. Major bargains often appear on-line, especially if your needs aren’t state-of-the-art. You may be able to get the one- or two-year-old version of a dynamite accounting software package (which will probably be more than powerful enough for your needs into the distant future) for a small fraction of its original cost. Discontinued lines of furniture, computers and other electronic equipment, toner for copiers and printers, or just plain low prices on things you need can often be found with a little searching. Once again, you have to add shipping and handling fees, but you’ll save on person-hours.

With any of these strategies, remember that it’s important to balance the money you save with the value of what you get – the level of service, for instance, or free technical support – and the time and effort you spend. If it takes someone in the organization a day to find a bargain on a new computer, what’s the difference between that day’s pay and the amount you saved? If it’s not considerable, it’s probably not worth it. By the same token, if you buy an inexpensive piece of equipment that’s constantly out of the office being fixed, or you get a deal from a CPA firm that regularly messes up your tax returns, you haven’t found a bargain.

NEGOTIATING WITH FUNDERS

As mentioned above, you’re obligated to fulfill the terms of a grant or contract. Those terms aren’t necessarily cast in stone, however, and most funders are willing to negotiate, at least within broad limits, about such things as payment schedules and uses of money. After all, the funders are concerned that you do what you’ve been funded for as well as possible. They’re usually willing to do whatever they can, within reason, to make that happen.

Renegotiating your payment schedule may mean that you can stave off cash flow problems. The ideal is being able to ask for money whenever you anticipate needing it. It will take the funder a certain amount of time to deal with the request for funds – anywhere from a few days to months, in the case of some state or federal bureaucracies – and you have to leave enough time so that you’ll actually receive the money before you run out of what you have.

Most funders have a mechanism that allows them to approve changes in your line -item budget (although not in the total amount of funding) up to a certain point in the fiscal year. This gives you the opportunity to address unforeseen circumstances, or simply to respond to the real expenses of your project. As long as you can justify the changes, and as long as the changes are directed toward accomplishing what you ‘re funded to do, funders will almost always approve.

MAINTAINING SYSTEMS

As you use your money management plan day-to-day, you have to make sure that all the systems you so carefully designed continue to work properly.

Some of the areas that have to be maintained:

  • Data entry and backup. Any systems that are computerized – accounting, payables /receivables, payroll – need the right numbers put into them constantly so that they’ll always be up to date. In addition, they should be backed up regularly – ideally every day – so that you won’t lose all your data if the power goes out or if your hard drive crashes. If those systems aren’t computerized, the data entry – using pencil and paper – is still just as important, and can be even harder to maintain, because it takes longer.
  • Paying bills and billing. Your system is useless unless someone actually does the paperwork on a regular basis, and keeps careful records.
  • Payroll and payroll taxes. Someone has to make sure that Social Security, Medicare, state and federal taxes, unemployment, and workers’ compensation are all paid correctly and on time. In addition, whoever is in charge of payroll has to keep up with changes in the tax laws, as well as with any changes in employee benefits, so that he withholds the proper amount from employees’ checks in either case. W-4 forms (employees’ declarations of the number of their exemptions) have to be on file, and W-2 forms (the employer’s declaration of how much was withheld and paid in all categories of taxes from each employees’ pay for the year) have to be issued to employees, with copies sent to the federal and state governments, between January 1 and January 31.
  • Audit and organizational tax requirements. An audit has to be arranged each year, for which someone in the organization has to gather and provide all the necessary financial and other records, often including Board meeting agendas and minutes, actual contracts and grant agreements, and records of services provided or activities conducted. In addition, the Form 990 (for the IRS) and any relevant state tax forms have to be completed and sent to the appropriate agencies within three and a half months of the end of the organization’s fiscal year.
  • Printed forms. If you use purchase orders or other printed forms for financial systems, they have to available when they’re needed, whether that means buying generic ones, running them off on a computer printer or copier, or ordering them from a printer.

In addition to general system maintenance, it’s important to evaluate systems continually to make sure they’re working efficiently, and to make changes where necessary to make your money management as effective as possible.

WHAT ARE SOME INVESTMENT ISSUES?

If your organization is one of the lucky – or well-run – ones whose cash flow is healthy, you may find yourself with extra money in the bank. Rather than letting it sit around gathering dust in a no- or low-interest checking account, you might consider investing at least part of it in a something that yields higher interest.

Certificate of Deposit (CD) gives you a high rate of interest in return for leaving your money in the bank for a specified length of time – usually from three months to five years. A three- or six-month CD provides high interest, but doesn’t tie up your cash for too long. If the organization needs cash, the money can be withdrawn before the time is up, but there is a substantial interest penalty (i.e. the CD’s final interest rate will be considerably lower than if you kept it for the full period).

Money Market Account yields high interest in return for keeping a certain minimum balance. While Money Market interest is lower than that of a CD, cash in a Money Market Account is available without any penalty as long as the minimum balance (usually about $5,000.00) is maintained.

Both CD’s and Money Market Accounts provide good ways of putting aside money for short periods of time to deal with anticipated cash flow problems. They also provide the opportunity for longer-term high interest opportunities.

For most organizations, investing in the stock or bond markets makes less sense, since these are by nature long term propositions that carry a certain amount of risk. Because of ups and downs in stocks, cautious investment strategy means staying in the market for at least ten years, which may defeat your organization’s investment purposes. In addition, your investment needs managing, and management fees are charged whether you’re making any money or not. Unless your organization has an endowment or some other amount of money large enough to generate significant income (and which you can afford to have tied up for a long time), investing in stocks and bonds is seldom useful.

If you have a larger amount of money to play with, you might consider a capital investment. A capital investment means taking some of your capital – the worth of your organization – and using it to buy something which itself becomes part of the capital of the organization. For instance, you might consider, as many non -profits do, buying a building.

Some of the advantages of this course of action:

  • There are numerous federal and state programs available to provide low-interest mortgages for non-profits
  • You can lock in your rent (i.e. your mortgage payment – as a tax-exempt organization, you’ll pay no property tax) for the period of the mortgage, typically 20 years. This allows for easier financial planning, since you know exactly what you’ll be paying for space.
  • The building itself is an asset of the organization which can be sold if necessary, or can be kept until the organization owns it free and clear
  • You may be able to generate income – perhaps enough to cover the mortgage and upkeep – by renting out the parts of the building you don’t use yourself. If you can eliminate your space costs in this way, you’ll improve your cash flow situation tremendously.

Other possible capital investments, depending upon the needs and purposes of your organization, could include buying vehicles, major pieces of medical equipment, land, etc.

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