As nonprofits are implementing new FASB financial statement disclosure requirements on liquidity, now is a great time to reflect on the concepts associated with liquidity and how they impact a not-for-profit organization. It is also an opportunity to educate leaders on why it is becoming a critical topic for all nonprofits, and what they can do to leverage liquidity to ensure the health and security of the organization.
The liquidity disclosure is significant, and as a measure of the organization’s short- and long-term viability it will only grow in importance. The qualitative and quantitative information included in the financial statements will drive decisions for donors, funders, and others.
Discussions You Need to Have
– There is a general belief that operating budgets address cash issues, but few nonprofits formally budget cash requirements or fully prepare for cash flow crises. Discuss the challenges your organization faces so its leaders can be part of the solution.
– Being unprepared for cash flow issues can cripple an organization. It can lead to staffing and morale issues. While the disclosure requirements do not change anything here, they do establish a new level of urgency for the topic and shine a light on a serious issue.
It is not a finance-only matter
– The finance function plans, measures, and reports on liquidity-related matters, but it has very little control. Finance can manage accounts payable timing and access to debt instruments, but the primary cash drivers are operations, development, and strategy execution.
Growing in importance
– The FASB financial statement disclosures were enacted to increase transparency and to provide evidence of an ability to continue operating long-term. You can be sure that donors, funders, sponsors, and bankers will look closely at the new disclosures.
These disclosures also will be noticed by the rating and ranking companies. Boards tend to be sensitized to ratings and rankings, so education and planning on liquidity will likely be a board priority sooner rather than later.
Actions to Improve Liquidity
Diversify funding sources
– Leaders need to find alternative funding sources so that the nonprofit is not overly reliant on a single funder type. Uncovering these sources will require focused resources, a plan, and possibly outside consulting support. CPAs can help by identifying funding cycles and by providing input on messaging and proposals.
Hold frank discussions on costs
– Many funders place restrictions on recoverable costs, specifically general or administrative costs. Give your leaders as much information as you can on the nature and importance of costs. Help them build and deliver messaging on the value of adequate funding and the risks of underfunding these costs.
Review banking relationships
– Work with the treasurer or finance committee to determine if your current bank is nonprofit-savvy. Explore products such as lines of credit and tax-exempt financing to include in a liquidity plan, as well as services that can accelerate cash collections.
Prioritize cash forecasting
– Cash forecasting requires inputs from most members of the leadership team. Each leader needs to understand the timing of receipts and expenditures related to their function to translate an operating budget into a cash-based forecast. Pay close attention to large expenditures in the administrative function, such as benefits and quarterly or annual service contracts.
Partner with the development team
– CPAs can help develop an expected cash flow map from each type of development activity. Use this to arrange timing of major events or campaigns to align with gaps or low points on the cash forecast. Provide input on the messaging to contributors that may move them toward recurring monthly contributions.
Establish board-designated cash reserves
– Setting aside funds for emergencies is critical. Adequate cash reserve levels vary, but six to nine months of normal operating spending is a good starting point. You will need to make your own assessment to determine if you need more or less.
Liquidity as a performance assessment component
– Managing liquidity should be integrated into all leaders’ performance appraisals. This will ensure that all functions aid in ensuring the fiscal stability of the organization. Work with the leadership team to identify ways that each leader can positively impact liquidity.
Donors, funders, bankers, and others will have access to qualitative and quantitative aspects of nonprofits’ liquidity positions. CPAs understand liquidity, but managing it can no longer be just the CPA’s responsibility. It must be shared by the entire leadership team. CPAs must educate leaders and provide clear reporting for decision-making. Beyond that, we must work with leaders to optimize liquidity in all facets of operations and development.
Michael F. Cade, CPA, CGMA, is strategy consultant and executive coach for MFCCoach LLC in Morrisville and a member of the
Pennsylvania CPA Journal Editorial Board. He can be reached at firstname.lastname@example.org or on Twitter @mfccoach.