05.18.2020

Organizational Cash Flow Planning in a Crisis

Michael Ibrahim, Program Manager

Capacity Building | Cultural Investment Portfolio

This is part 1 of a 3-part series in support of our Safe Harbors Program.

Achieving safe harbor during the current COVID-19 pandemic includes understanding how cash moves in and out of your organization week by week, creating several ‘what if’ scenarios and budgets based on that data, and finally, working with the organization’s governance and management to craft the path forward. Today, we outline the first step in the process, understanding how to conduct cash flow planning during a crisis.

As we seek to react to the current pandemic, cultural nonprofits have three overlapping needs:

1. Response: Immediate reaction to the crisis resulting in changes to operations and provision of needed community services.
2. Recovery: Bringing the business model back to a steady state, correcting for lost revenue, canceled events, shows, classes, programming), delayed revenue (delays in contract payment, postponed fundraising events) and increased expenses (spiking demand for services, cleaning and technology costs).
3. Resiliency: Preparing for the next time a crisis inevitably hits and working with funding partners to develop long-term financial resilience strategies.

The COVID-19 crisis is particularly challenging due to the ongoing nature of closures and physical distancing, with no true way to gauge end dates. It is best to focus planning on the areas you have stewardship, or at least some control over. To aid in the process of response, recovery, and resiliency, we recommend three initial steps:

Step #1: Conduct weekly (not monthly) cash flow projections

Step #2: Establish your priorities and determine how they align with your organizational values

Step #3: Plan your response

Why conduct cash flow planning in the first place?

In non-crisis times, cash flow planning makes life easier in developing funding reports, preparing for board meetings, and anticipating challenges and opportunities. During a crisis, it provides invaluable data to help lead organizations through difficult decisions on their path to safe harbor and recovery.

The most obvious returns in traditional cash flow planning come in both financial management and governance tasks. By understanding the trends in cash throughout the year, organizations can determine how much cash to keep in reserve to access during months when cash is low, and determine whether short-term debt (e.g., a line of credit) would be an appropriate funding source, and if so, how much credit would be necessary. From a governance perspective, a cash flow document readies the board to engage regardless of their financial background and enables informed discussions about strategy and policies. From a funding and stakeholder communication perspective, cash flow projection can be an effective, data-centric communication tool. By grounding an ask in the organization’s current reality and the timing of the funding they plan to receive, leaders may be able to engage board members or funders to give early or during challenging times of the year. Finally, from a mission and program perspective, cash flow planning enables leadership to identify a path to mission fulfillment and ensure that programs are not unnecessarily interrupted.

However, in a crisis, week to week cash flow planning helps leaders understand how they can create a safe harbor and plan the framework needed for recovery.

Crisis Cash Flow Step #1: Conduct weekly (not monthly) cash flow projections

Short term cash and liquidity is important in a crisis. Weekly forecasts facilitate greater net cash visibility, especially if cash is tight.

• Once organizations have a handle on cash, they can use it as their most important tool for crisis management.
• Once organizations know their short-term cash situation, they can move to understanding their priorities so that they can best plan for new budget projections and scenarios.

Projecting cash in a crisis is a real-money exercise. When thinking about cash, leaders want to answer the question of whether they have enough cash on hand to meet their expenses weekly. Revenue, for those using accrual accounting, is recorded when you receive revenue, not necessarily when you receive cash. For example, you record a grant as revenue when you receive the award letter. For an education organization that is fee-based, you record revenue when you deliver the services. In both cases, you may not receive the actual cash until later, and sometimes it is several months later. It is important to have a clear understanding of revenue, but when doing crisis cash flow projections, estimate the timing of cash receipts rather than revenue. The same is true of expenses. You may spend thousands of dollars in the months leading up to a special event before you actually host the event. Expenses would not technically register until you host the event in accrual accounting, but for the purposes of crisis cash flow, you need to know from a management perspective when you spent that money. With cash flow projections, cash in and cash out will not always be the same as revenue and expenses as recorded in the accrual system. In a sense, it is very similar to how one would record transactions in a checkbook. It is also important to note that restricted cash needs to be tracked separately. If you have cash on hand that must be spent for a specific purpose, you do not want to lump it into overall cash because it would distort your perspective on the cash that you currently have available to spend.

All cash projections will have some uncertainty and almost never plays out exactly as one would expect. You may receive new information that changes your assumptions and the data in the document, particularly during a crisis. But it is still important to do your best to project, based on the past and what you know about the future so that you can effectively guide your organization through the uncertainty that is inherent during a crisis. Please use the NonProfit Finance Fund crisis cash flow template to help you conduct short-term, 13-week cash flows.

Crisis Cash Flow Step #2: Establish your priorities and determine how they align with your organizational values

Once leadership understands how cash is moving throughout the organization on a micro level, it is time to consider the hard questions:

• What are operational and programmatic priorities? What are objectives during this time?
• Are you looking to preserve mission at all cost, looking to make it through the crisis to keep operating for the long-term, or somewhere in between?
• What are the north stars you want to use to make decisions about programs and staff? How willing are you to make tough choices?
• Do you have mandates that have to be prioritized?
• What can’t you do right now because they are impossible to deliver or not mission critical?

Cash flow planning is critical in helping leadership establish these priorities and the corresponding time horizon for decision-making. The flow helps leaders know if they have enough cash on hand to operate, either “normally” (pre-COVID), in total hibernation, or somewhere in between. To aid in this decision-making, cultural nonprofits should think about cash inflow options available to them:

Have Cash

• Internal cash reserves built from unrestricted operating surpluses
• Approach funders and donors to ease restrictions on existing revenue

Receive Cash

• Approach funders and donors for accelerated/advanced payments
• Change the timing of specifics events or annual appeals
• Conversion of funds (ticket revenue to donations)
• The Payroll Protection Program (PPP) and other Small Business Administration funds specifically related to COVID-19

Borrow cash

• Draw on an external line of credit or bridge loan, if appropriate

Next, leadership should consider cash outflow questions, such as:

Do not spend cash

• For example, negotiate favorable payment plans with vendors and lenders.

Payables

• Which vendors will be more forgiving in this current environment? Can you be late in rent if you are waiting for cash from other sources? Are there some expenses more essential to preserve than others, for example, maybe you prioritize your contractor payments knowing they are hit particularly hard right now?

Expense savings

• If you are closed or operating limited programs, are there expenses that you will not incur?

Payroll

• Can you cover your next upcoming payroll draw in full? Would a different payment schedule ease cash flow? How much notice can you provide your people if your ability to cover salaries changes?

Governance and Cash Issues vs Cash Flow Issues

As fiduciary agents of organizations, board members have the responsibility for approving the budget and monitoring the assets necessary to operate (including cash!). Here are some tips on working with the board to understand cash position and decision-making:

• Cash flow projections should be shared with Executive and/or Finance Committee at least monthly (in a crisis, preferably weekly) and in full board materials.
• Cash Issue​s vs Cash Flow Issues: The cash flow projection illuminates the difference between ‘cash flow issues’, which involve a temporary lack of cash due to seasonal timing of receipts and ‘cash issues’, which involve a loss of funding that produces a cash shortage with no predictable end date. ‘Cash issues’ are usually associated with an operating deficit; in other words, expenses exceed revenue whether in cash or other forms. ​
• COVID-19 is a unique cash and cash flow issue, and talking through that interplay and distinction is important with the board.

Crisis Cash Flow Step #3: Plan Your Response

Contingency planning can be a complex, program by program exercise, or as simple as asking yourselves what you would do if revenue fell by 10%, 20%, etc. Organizations need to prepare for the worst case; you do not want to be forced to make decisions that your staff, constituents, and board are not ready for. Leadership is not expected to solve the crisis by itself. Some of best solutions come from outside the organization’s senior management, such as the people delivering your services. Program staff may be in the best position to help think about options. In addition, the board can help prioritize and implement the alternatives that get identified.

Leadership should specify the triggers that will cause the organization to move to Plan B or C. For example, an X% decline in foundation grants might lead us to do Y. Or, if our membership or number of patrons is X% below where it was last year at the same time…what would your response be? What cuts might you make?

Among the hardest things for organizations to acknowledge is that it is possible that a given situation is not solvable; that viable options include substantial reduction in activities. In this case, exploring restructuring opportunities (like downsizing, partnering, merging) might be necessary. Some of these options may in fact be temporary depending on what opportunities present themselves in the future, while some, like a merger or soft-landing closure, can be the most responsible option in stewarding the organization’s mission and protecting public good.

In summary, good financial decision-making requires timely, accurate, and transparent financial information regardless of the size and type of organization. Tools, like Nonprofit Finance Fund cash flow projection template will not make difficult decisions for leadership, but instead, provides the data needed to build multiple scenarios and budgets, and ultimately, craft the path forward.

Additional Resources:

Mass Cultural Council Safe Harbors Webinar on Cash Flow Planning in a Crisis
Nonprofit Finance Fund Crisis Cash Flow Planning Tool

Read Also

Part 2 in this series: Building Organizational Scenarios and Testing Budgets
Part 3 in this series: Managing in an Age of Crisis

Capacity Building | Cultural Investment Portfolio