| Nonprofit Cash Management Toolkit

Posted in Non-Profit at 9:00 AM by Loftis Consulting

For a non-profit, understanding the health of its cash position is critical.  Many not-for-profit organizations are dependent on outside contributors and can’t control the use of monies coming in for various reasons:

  • Funds received are restricted to be used for only certain purposes
  • Fund received do not cover the indirect or administrative costs of programming
  • Significant payment delays from government agencies

In order to prevent your nonprofit from erroneously using restricted cash and/or running out of cash all together, I recommend using some financial management tools on a regular basis to keep track of your cash levels.  Catching cash issues early is critical to maintaining a financially viable organization.

Given that for most non-profits payroll is usually its biggest expense, the Executive Director and finance team should keep an eye on making sure there is enough unrestricted cash available to make payroll each month.  The Payroll Coverage Ratio should be calculated monthly.  A healthy Payroll Coverage Ratio will be higher than 2 to ensure payroll coverage for the entire month as well as coverage of non-payroll expenses.

Example of Payroll Coverage Ratio:

Monthly Gross Payroll Need = Next Month’s Gross Payroll/2 = $600,000/2 = $300,000

Unrestricted Cash In Bank = $650,000

Payroll Coverage Ratio = Unrestricted Cash In Bank/Monthly Gross Payroll Need = $650,000/$300,000 = 2.2

Please keep in mind for non-profits on bi-weekly payroll cycles, the Monthly Gross Payroll Need amount will be higher two months out of the year due to three payroll runs instead of two.

Another ratio that should be tracked is the Days Payable Outstanding (DPO).  This ratio will let you know if the organization has cash because it is delaying payments to vendors.  Normally, this ratio is tracked at least quarterly.  If the DPO increases significantly, then you know that payments are being delayed. If it stays flat quarter to quarter then vendor payments are not being delayed.

Days Payable Outstanding (DPO):

DPO = Ending Accounts Payable/(Vendor Purchases/Number of Days in Measurement Period)

The measurement period is based on how often you are tracking DPO. If it is quarterly it should be 90 days, if it is monthly then use 30 days.

By adding these metrics to your monthly financial review, you can make sure you keep on top of the financial health of your non-profit.  For more tips on managing non-profit cash check out “How Cash Forecasting Can Help Your Nonprofit Stay in Business“.





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