Cash Flow Forecasting for NFPs

Cash flow management is critical to Not for Profit organisations and the end of the financial year represents a great opportunity to reflect on the year that has passed and plan for the year ahead, according to experts Matthew Muller, Head of the Davidson Institute at Westpac and Barry Thatcher, National Head of Education and Social Sector Banking at Westpac.

It is a numerical picture of the predicted flow of funds for a particular period, usually month-by-month for the year ahead. Some organisations find it helpful to look at shorter periods, such as weeks or fortnights, although useful this is more time-consuming to prepare.Putting systems in place such as a cash flow forecast can be a vital tool for Not for Profits.
So what exactly is a cash flow forecast (sometimes called a cash budget)?
A cash flow forecast has the following crucial characteristics:

• It allows an organisation to predict what cash will come in and how much will go out over that period.
• It is an extension of the budget, and it should be done at the same time as the budget for the year ahead.
• It is also an extension of overall budgeting, but income and expenditure are allocated against a timeframe and the forecast does not follow accrual accounting. This means cash is recorded as it comes in and as it goes out, not when the financial commitment was made (e.g. invoices sent or supplies ordered).

Creating a cash flow forecast is not difficult once the figures are available, but the challenge is to get accurate figures.

The easier way to do it is to start with previous budgets, cash flow statements, or cash flow forecasts to see if they show any clear seasonal patterns of income and expenditure. Then consult the current strategy and budget to see if any major income or expenditure is expected, and when this is likely to occur.

If there are any sub-committees that are responsible for their own budgets, ask them to contribute to the forecast or it will bear little resemblance to reality.
Draft the forecast so that the actual figures can be inserted next to the forecasted figures. This will allow an analysis of the data quickly to identify any significant variations.

If this is not done, there's a risk an organisation won't notice minor discrepancies and will lose the management value of the forecast. There's the added danger that the forecast may be used as the basis for the following year, so will perpetuate the errors.

The point of the exercise is to make sure the organisation knows at any time exactly where it stands from a financial perspective.
The cash flow forecast must also include estimated bank balances for easy comparison with your actual bank balances. The closing balance for each period is the opening balance for the next period.
Common elements of a cash flow forecast are:

• Cash in – Grants, sale of goods and services, subscriptions, return on investments, donations, fundraising activities, sale of assets, tax refunds.
• Cash out – Operating activities, such as staff, telephone bills, power bills, rent, travel, stationery, printing and copying, postage, as well as servicing finance, tax, cash used to buy assets, equipment purchases and special project costs.

An organisation can improve its cash flow management by:

• Developing an accurate cash flow forecast linked to the budget and strategic plan
• Separating the recording and handling of cash
• Banking cash promptly
• Paying most expenses by cheque in order to have a record
• Having all cheques countersigned
• Keeping cash in a safe place
• Reconciling bank statements regularly
• Collecting money from debtors as quickly as possible
• Centralising payment procedures
• Developing close relationships with suppliers to negotiate mutually beneficial payment policies
• Reviewing the cash situation regularly and analysing and addressing significant discrepancies from the budget.
• Having appropriate authorisation and risk management policies.
• Managing cash holdings profitably

For more information on how strategic tools and tips for planning, visit www.davidsoninstitute.edu.au for a number of useful articles. Short courses are also available.

About The Davidson Institute: It is Australia's First School of Money backed by – Westpac Banking Corporation.It provides an extensive range of financial education, from free seminars to facilitated sessions on Cash Flow to Superannuation, and accredited Certificate IV and Diploma courses in Business Management.

Westpac Social Sector Banking provides a customised range of banking solutions to suit Not for Profit organisations, charities, associations as well as single-interest and community groups.

For more information on how Westpac Social Sector Banking, visit www.westpac.com.au.