Declining donations, dues, grants or sponsorship funds often leads to nonprofit budget deficits. But you can reduce the risk of such deficits by improving your cash management, particularly when it comes to billing, receipts and disbursements. The following can help ensure that cash is available when your organization needs it.
The sooner your organization accumulates cash, the better your cash flow. To expedite cash receipts, consider moving your fundraising calendar ahead. By sending an appeal in July rather than November, for example, your nonprofit may receive significant cash in late summer. Then mail or email reminders in November to those who haven’t yet given. By doing this, you’re more likely to see contributions in December as well.
Try to collect installment donations earlier, too. Instead of waiting for each payment of a four-quarter gift, contact those donors who are clearly predisposed to giving. Asking for the remaining donation in advance may well speed up the process.
Technology is essential to expediting receipts. Many nonprofits continue to receive at least half of their revenue by check. But electronic payments are much more efficient for both organizations and donors. They also deter fraud by reducing cash handling.
Get the billing right
Billing errors, whether in the amounts invoiced or the recipients’ mailing address, can delay payments and hamper cash flow. Take steps to get the details right on every invoice. For example, you can request updated address or credit card information in every encounter with a payer. Reports of declined credit cards should be reviewed regularly so that recurring payments can be made without delay.
Also make your invoices clear, clean and easy to understand. Use text descriptions rather than internal billing codes. The recipient should have no questions about what the charges are for or how they’re computed. Confused payers may just set their bills aside.
And consider issuing bills earlier. If a charge is incurred at the beginning of the month, but you wait until the end of the month to bill — and then allow a 30-day grace period for payment — you’re likely waiting at least two months to collect. A better approach might be on-demand or real-time billing, where you bill immediately and thereby reduce the lag time.
Several metrics will help you stay on top of your receivables. For example, Days Sales Outstanding (DSO) is a valuable tool for evaluating your effectiveness at collecting on invoices or even donation pledges. DSO is calculated by dividing the average receivable balance for a period by the total billed revenue for the period and multiplying it by the number of days in the period.
Better manage disbursements
Managing cash outflow goes hand in hand with accelerating incoming cash flow. If you’re facing severe deficits, you may need to decelerate your bill payment or negotiate extended payment plans with vendors.
In crunch times, prioritizing disbursements is critical. But be careful: Although employee compensation can account for as much as 60% to 70% of some nonprofits’ budgets, such compensation generally can’t be delayed legally. For example, the IRS has strict rules about when deposits must be made to employee contributory benefit plans.
Even in relatively flush economic times, nonprofits need to take a proactive approach to managing cash flow. This will help you weather any financial storms that come your way.