The Cash-Flow Crunch

3 steps to effective ministry money management.

Michael W. Lowstetter | posted 12/04/2009

We have all witnessed our national economy ebb and flow. It is on a cycle of ups and downs. We love it when the economy is up, and we panic when it is down. Unfortunately, we are currently seeing one of the lower lows. No matter where we are in the economic cycle, cash is king. But when things are down, sometimes very down, cash can be one of the most critical points of concern for our organizations.

I'm sure you have felt a cash squeeze like we have at Shepherds Ministries: giving is down, sales are slowing, expenses continue rising, and debt is adding up. We always need to be good stewards of our funds, but during these times, the demand for a high level of cash management is critical and called for by almost everyone. This is the perfect time to tighten up your organization's cash flow management systems.

Three Steps for Effective Cash Management

Cash flow management is the process of predicting, tracking, and controlling the cash coming into and going out of an organization over a set period of time. This definition highlights the three steps to effective cash management. Predicting is simply putting together a budget that reflects your goals. Tracking is important in order to know if adjustments are needed. You will need to track your actual performance throughout the period. Controlling the cash through active management is how you can influence the flow of cash. This is often the most difficult but most important step in addressing cash management concerns.

In order to effectively manage your cash, set a goal for your organization. Cash flow budgets are an essential element in this process.

1. Predicting Cash Flow

One of the most challenging parts of setting a cash flow budget is predicting cash inflows. Because of its difficulty, this is the best place to start. List all of your income sources and evaluate each one to determine when it is collected. Using industry trends or program changes, calculate possible increases and decreases in cash inflows.

• Use historical data. Historical data are very helpful in predicting cash needs for items such as supplies, travel, entertainment, postage, and professional services—expenses that are incurred frequently but not consistently. Historical data are also essential for helping to predict the ups and downs of cash inflow. It's best to footnote your cash flow budget with as much source data as possible.

• Plan for big events. Organizations and churches often hold big events that impact both inflows and outflows. Usually these events are easily predictable. If you're planning a golf outing, include this increased cash income and the preceding cash outflow in your cash budget. Be sure to plan for extra cash needs for capital expenditures and bonuses, and include all predictable usages of cash.

• Align with your budget. If your organization produces an operations budget, use this document as a guideline for your cash flow budget. Aligning with your existing budget will help to project the amount of cash needed for salaries, benefits, utilities, insurance, debt repayment, and other operation expenditures. If you use the accrual method of accounting, adjust line items such as accounts receivable and accrued contributions back to the cash method.

This is the perfect time to tighten up your organization's cash flow management systems.

2. Tracking Cash Flow

The second step in cash flow management is developing a system for tracking actual cash use. Goals and budgets are important, but they will be ineffective without regularly reporting on how actual performance lines up with projections.

• Keep it simple. The reporting structure for your cash tracking should not be detailed. The report needs to be simple to both produce and read. While compiling the report, consider grouping expense line items. For example, rather than listing cash used for salaries, payroll taxes, medical insurance, and other benefits individually, group them into "salary and benefits." An easy way to produce these reports is to tie them back to your bank statements. If you use just one operating account, the credits and debits on the account are your inflows and outflows for the month. Develop a method that's easy to produce and can be implemented effectively.

• Report with timeliness. Cash flow budgets typically cover a short period, six to twelve months, so the timeliness of the reporting is very important. As a financial manager, you want this report published soon enough for spending adjustments (or efforts to increase cash inflow) to be made. A lag in reporting could limit your options for future modification.

• Get others involved. Success in managing cash flow will increase if you can get support from key personnel. It's important that everyone who has purchasing authority understands cash flow and receives regular feedback on their performance. The senior management team and board of directors (or senior pastor and elders/deacons) should be informed of cash flow usage on a monthly basis.

3. Controlling Cash Flow

It's not enough to simply predict and track your cash. The most important step in the process is controlling cash flow. Below are a few techniques for managing the cash coming into and going out of your organization.

Cash Inflow

• Deposit cash promptly. Organizations need to create a process that addresses how to handle incoming cash. If your organization gets checks and credit card or cash payments daily, you should deposit funds daily. If you are a church, your policy will most likely revolve around depositing funds weekly. Set a policy based on your needs. Once it's in place, assess it periodically for effectiveness.

• Establish a collection process. Most of us working in Christian ministry haven't considered the need for an effective collection system. But like for-profit businesses, charities need timely payment for the services they provide. It's not a fun system to establish, but it would be worse to have your organization go out of business because you were not collecting money owed to you.

• Create monthly contributions programs. If your organization relies heavily on donations, consider creating monthly contribution programs. By having donors sign up for them, you can better align the timing of their gifts with the expenses you incur.

• Discount for early payment. Sometimes getting fewer funds sooner is more important than getting the full amount you billed for. This is especially true in shaky economic times. Often you can speed up the collection of cash inflows by offering customers discounts for early or pre-payments. If they take advantage of the discount, you get usable cash more quickly. If they don't, you get your full profit margin. You win in both situations, and your customers have options.

• Use electronic funds transfers(EFTs). EFTs can be a fantastic way to increase the inflow of cash. If you collect payments, seriously consider requiring a payment method that is automatic, EFT, or credit card. Many people think their customers or donors will resist this, but one might be surprised at how open constituents usually are to this payment method. And in some cases, they might prefer this.

• Time fundraising activities. Simply look at the timing of your big fundraising activities. If you run major events or have special offerings, it's a good idea to plan those proceedings around times when you expect to have a cash gap.

Cash Outflow

• Ask for invoices. Many times when you are making a purchase, usually larger ones, you have an option of payment types. Choosing to be invoiced or billed can effectively slow the transfer of cash.

• Consider debt for purchases. Debt is definitely a four-letter word in the nonprofit industry, and must be carefully planned and considered. However, when your organization is making larger purchases, such as property, vehicles, and other capital items, debt might be an option to prevent a large outflow of cash.

• Control operational spending. The best way to control outflows of cash is to avoid expenditures in the first place. In efforts to control cash, start by looking at your current expenses. Adjusting your spending habits goes a long way in controlling your cash outflow.

Cash management doesn't have to be a complicated, time-consuming project, and when the economic cycle is down, it becomes so much more important. If you think you might have a cash flow problem, start fixing it today by putting in place these simple cash management tips.

Michael W. Lowstetter is vice president of finance for Shepherds Ministries (ShepherdsMinistries.org) and Shepherds College (ShepherdsCollege.org) in Union Grove, Wisconsin. Shepherds provides residential, vocational, and educational services to people with intellectual disabilities. You may e-mail Michael at mlowstetter@shepherdsministries.org.

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