How Can Nonprofits Maintain Positive Cash Flow During Fundraising Lows?

8 min read

April 11th, 2024

Cash flow challenges for nonprofits occur when more money flows out of the organization than into it at any given time

As a result, this can cause a cash flow shortage where you don't have enough cash on hand to cover your immediate necessities, such as payroll, office rent, or direct program costs. Cash flow shortages not only create financial instability and interrupt operations, but they can also lead to the ultimate failure of a nonprofit organization. 

While cash flow shortages are often an inevitable part of running a nonprofit — especially during the fundraising off-season — executive directors and nonprofit board leaders can take action to mitigate cash flow shortages with proper preparation, planning, and responsible financial management. 

Strengthen Your Nonprofit Cash Flow Management With These 10 Strategies

1. Develop Strategies for Fundraising Off-Season

Although your organization's services might be in high demand throughout the year, nonprofits still have a seasonality to their operations with respect to donations and fundraising. The nonprofit fundraising off-season generally runs from January through August, peaking during the summer months. 

Depending on how long your nonprofit's fundraising slump lasts, you could be in dire cash flow straights; eight months is a long time to maintain operations without much new revenue coming in. Getting through the off-season requires careful budgeting planning, and nonprofits organizations can also work on strategies to increase fundraising during the slow times of the year. 

Consider hosting a summer event or even a Christmas in July "Year-End" Giving campaign. Remember that corporations set their own fiscal tax year, so for some of them, July might indeed be the end of the (tax) year.

Read More: 5 Tips for Nonprofit Fundraising During Times Of Crisis

2. Diversify With Alternative Nonprofit Funding Sources

Nonprofit funding should come in lots of diverse forms. Relying too heavily on any one source or type of funding source essentially puts all of your eggs in one basket, creating the potential for a single point of failure in your organization. Diversifying with alternative funding sources will help round out your organization, reduce risk, and mitigate fundraising lulls that could lead to cash flow shortages. 

Some potential funding streams for nonprofits include:

• Corporate partnerships and sponsorships
• Crowdfunding
• Fees for service or earned income
• Event revenue
• Multiple grant sources (federal, state, and local governments and foundations)
• Business loans (especially lines of credit or cash gap funding)
• Membership fees
• Donor ambassadors and peer-to-peer giving campaigns

3. Know Your Numbers, Create a Budget, and Actively Forecast Cash Flow

A well-run back office is vital to healthy cash flow and financial stability in nonprofit organizations. Your back office should be serving your nonprofit by collecting financial data, generating financial reports, and helping you make data-driven decisions to maximize your efficiency and expand your mission. If your back office isn't in order, then your bookkeeping and accounting tasks will feel like more of a burden than a blessing. Your back office should be helpful and not a hindrance. 

Take steps to automate your processes with financial management tools like accounting software designed for nonprofit organizations and automation applications that streamline data collection and reporting in real time. 

Once your back office is in order, know your numbers, create a budget, and revisit your budget at least every month to make adjustments that ensure you stay on course. Additionally, you should be actively forecasting your cash flow, using trailing-twelve-month cash flow statements to help you better anticipate funding slumps and/or spending increases that will lead to financial trouble. Forecasting ensures you know that a cash flow crisis is coming before it occurs, allowing you to take steps to prevent and avoid real problems. 

4. Use Fund Accounting for Better Restricted Fund Management

In nonprofit organizations, there are several reasons why a cash flow shortage might go undetected up until the time when you are actually short on cash. One of the main reasons this can occur is due to nonprofits having different categories of funds, such as restricted funds. 

While restricted funds will show up in your balance, they can only be used on certain types of expenses. So, when it might look like you have plenty of cash for operating, you might actually be running short because the cash you have can't be spent on keeping the lights on. 

Nonprofit organizations can better track different types of funds and understand their cash flow by using the fund accounting method. This accounting method actually splits your funds into separate categories for tracking, budgeting, and spending so you can more clearly keep track of your organization's financial health. 

5. Get a Handle on Multi-Year Funding

Another cash flow challenge in nonprofits is reporting multi-year funding in a way that does not obscure your actual cash on hand. When funding is received from grants, foundations, or pledges that extend over multiple fiscal years, it can create challenges with recognizing the revenue.

The timing of recognizing revenue can vary depending on the type of funds being received (restricted or unrestricted). In cases where revenue must be recognized when funds are awarded (but not necessarily received), this creates the illusion of more cash on hand than what is actually available. This type of mix-up can lead to unforeseen cash flow shortages. 

Nonprofit financial managers should implement special processes for multi-year funding to ensure the amount of cash on hand is always visible while financial reports also remain accurate for compliance purposes. 

6. Cut Costs With an In-Kind Donation Drive

If your nonprofit is experiencing cash flow challenges, costs must be cut. In addition to eliminating unnecessary expenses from your budget, you should also consider holding an in-kind donation drive to minimize expenses for items you need to operate. Whether you're in need of office supplies to cut back on overhead costs or items that are essential to the services you provide, you can encourage donors to donate these items to your nonprofit instead of cash. 

Additionally, talk with businesses in your community that offer professional services to find out if they might be willing to partner with you in some way to offer in-kind donations of services, such as marketing, consulting, or legal expertise. 

Read More: How Much Do Bookkeeping & Accounting Services for Nonprofits Cost?

7. Optimize Payables and Follow up With Pledges

During a cash flow shortage, take the time to contact your vendors to see if you can negotiate more manageable payment terms or if they can offer a discount for early payment to save you a little money. Additionally, make phone calls to follow up with donors who have pledged gifts that have not yet been received. 

8. Improve Fundraising Processes

If you're in a fundraising slump, then it might be a good time to revisit your fundraising messaging, donor education, and communication strategies. Work on segmenting your donors into different groups, tracking the messages they receive, and measuring the response. This will help you optimize your strategy and focus on the right donors for a better fundraising ROI. 

9. Promote Monthly Giving

One of the best strategies to avoid cash flow shortages and strengthen an organization's financial health is recurring donations. Encourage your donors to break up large one-time gifts into 12 smaller, monthly gifts that are collected automatically. As your pool of recurring donors grows, your nonprofit will have a growing fund that it can rely on receiving every month. This will help to stabilize your cash flow and provide you with some relief during the long off-season. 

10. Create an Emergency Reserve Fund

When you're in the midst of a cash flow shortage, saving money is probably your last priority. However, it is important to budget for an emergency reserve fund. You should build savings into your budget every month or quarter as a top priority. This will help to ensure that, in the future, you won't have to worry about unexpected cash flow shortages because your organization will have a financial safety net in place. You can then tap into it when needed and then build it back up once the fundraising momentum picks up again. 

Experience Nonprofit Financial Sustainability With an Outsourced Financial Strategy

Nonprofit leaders are busy running their nonprofits, and that's why outsourced bookkeeping, accounting, and chief financial officer services can be invaluable when it comes to stabilizing cash flow and strengthening financial health. An outsourced provider with experience in the nonprofit sector can help you strengthen your organization's back office, automate processes to improve efficiency, and optimize your budgeting and spending for healthy cash flow. Additionally, we can work with you to maximize the mission impact of every dollar spent while ensuring your financial strategy is properly aligned with your mission.