All organizations face two major financial challenges: creating a BUDGET that ensures that expected income is greater than anticipated expenses and managing CASH FLOW to ensure that there is always enough money in-hand to pay for said costs.
Most often it is managing cash flow that is the greater difficulty. Which, when you think about it, makes sense. A company can always choose not to run a particular program or hire an additional employee if there is no expected income to cover the expense in question. However, once money has been pledged and the item ordered, it needs to be paid for and paid for on time.
As I act as an outsourced-CFO to both for-profits and nonprofits, I am exposed to this challenge from both sides of the fence. While many times, companies have an advantage over charities with regard to their finances (notice I didn’t say always), in the case of managing cash flow, nonprofits have a singular and unique advantage over their for-profit cousins.
Here’s why: Companies sell a product or service. Charities sell a social mission and act as go-betweens to fulfilling a donor’s passion.
There is rarely an instance when a customer will agree to pay a company ahead of time for a product or service that he or she has yet to receive. However, as nonprofits are subcontractors for their constituents, donors may be convinced to “pre-pay” and transfer their donation before an expected program has been run or expense incurred — especially if the donor knows that an early payment can save their favorite charity money in the long-term.
How does this play out in the real-world?
Many donors in the United States prefer donating in the last quarter of the year around the holidays (see section 6 in this report). You can imagine this can be troublesome for, let’s say, a summer camp for children with special needs whose main costs are incurred from May through September. While the year-end totals might predict greater income than expenses, poor timing of the donations can literally shut the camp down (it wouldn’t be the first time). However, thoughtful and fact-filled conversations with supporters can convince them to donate their money when it’s convenient for the charity, even though it might be at a less convenient time for the donor.
Let’s see a store pay a supplier two months early simply because it will aid the supplier in meeting his own financial commitments – ain’t gonna happen.
Keep in mind, however, saying that charities have an advantage is not the same as saying that they are exempt from standard, accepted business practices. While flexible donors can solve some cash flow difficulties, other similar issues might require a nonprofit to restructure its programs and expenses to better match its income schedule. No two organizations are the same and these conversations are best suited for joint discussions between a charity’s relevant staff, stakeholders, and on-call experts.
Getting financial support on-time — and when necessary, early — can be an instrumental tool for charities, which also allows a donor to increase the impact of his or her gift. Does your charity cultivate the kind of relationships that allow for these types of discussions with donors?
Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. Before putting into practice any of the information mentioned above, please consult your board, staff, and other relevant experts.
Questions? I welcome questions or comments in the comments section below. Please contact me directly if you are interested in how I can assist your organization in implementing the above ideas. As always, you can stay up-to-date with these articles and more by following me on Twitter.