Guest post by Claire Knowlton, Director of Advisory Services for Nonprofit Finance Fund

NCAR’s latest report on working capital trends in our sector provides such valuable context. Landscape reports like these can be incredibly helpful to nonprofit leaders who are trying to sort out which difficult dynamics are unique to their organization, and which are sector-wide issues. Limited liquidity is a common concern across the sector. At Nonprofit Finance Fund, we are frequently asked by our clients what amount of liquidity is right for them. The answer is highly variable from organization to organization, as it depends on the unique timing of cash in-flows and out-flows within each nonprofit. Some organizations have minimal gaps between cash in-flows and out-flows, and so need less liquidity than those with uneven cash flow cycles. Once you have calculated your organization’s working capital and compared it to sector averages, it’s important to translate that data into your own experience.

What to ask to understand your organization’s liquidity needs

• Does your organization expect to have negative cash at certain points in the year? If so, what is the size of the negative cash balance?
• Were there points in the past year when your organization could not pay its bills on time or had to delay activity due to lack of cash? If so, how much additional cash would have prevented this situation? Do you expect similar low points in cash this year?
• If your organization has plans to grow or change, how much more or less cash will be needed to manage liquidity?
• Does your organization have access to a line of credit? How has it been used? How large is the line of credit?
   

Securing a line of credit from a bank or credit union is one way to manage cash flow. The line of credit can be used to increase cash on hand during cash low points, and repaid during cash high points. Banks will rarely extend new lines of credit when cash is at a low point. Organizations should establish a line of credit “when they don’t need it” so it is available when they do. Use your line of credit responsibly: they are not meant to cover lost revenue, pay for annual deficits, or continue unsustainable activity.

Use a cash flow projection tool that provides detail on the timing of cash coming in and going out of the organization each month, thereby providing a picture of the organization’s cash balance throughout the year.  It gives insight into periods when the organization will have adequate cash to cover expenditures and periods when it will not. A cash flow projection is an essential document for determining how much liquidity an organization needs to maintain or build to manage the low cash points in the year.

If your organization has met its day-to-day liquidity needs, congratulations! Now you can being planning for longer-term goals to help the organization adapt and changing times and remain durable well into the future. 

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Claire Knowlton leads NFF’s work on full costs with nonprofits, funders, and other partners (read more in, "Why Funding Overhead Is Not the Real Issue: The Case to Cover Full Costs") She also leads several major initiatives, including a six-year effort that combines anti-racism, capacity building, and funding to develop new nonprofit arts models. Prior to joining NFF, Claire led a community-based art center in Los Angeles from financial distress to being a model of excellence in programming and organizational management. She also has worked as an auditor and tax-preparer for nonprofits. Claire earned a Bachelor of Arts from University of the Pacific with a double major in economics and religious studies. She is co-founder of The Life You Can Save, a nonprofit committed to ending extreme poverty by directing philanthropic dollars to effective solutions.