1. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Module 8 Cash Flow/Budget Analysis

2. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Introduction Many human services organizations are non-profit organizations and as such continually manage their cash reserves at minimum levels. Since cash is perennially a shortage for non-profit organization, it becomes imperative that the accounting team manage, budget and forecast their cash position for months in advance Cash Flow management and budgeting represents a set of processes to help managers anticipate their cash position in future months Cash flow analysis is about understanding the timing of inflows and outflows

3. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP So what? This helps agencies determine whether they will have cash shortages and take early action to address them Boards of Directors will want to know in advance if cash will be short They may want to know if cash is in good supply to consider investment options or further support of a specific program Boards of Directors usually require a variance analysis which is supported by a cash flow analysis –A variance analysis compares forecasted or budgeted cash flows with actual cash flows so that accountants and Boards can see where the differences were.

4. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Inputs to the Analysis The cash flow analysis process involves examining the inflows and outflows of cash Sources of cash inflows –Government grants –Donations and pledges –Fees for services –Endowment interest Sources of cash outflows –Salaries, Rent, Utilities, Fuel, Supplies –Fundraising expenses –Interest on loans or mortgages –Taxes

5. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Forecasting Inflows Different sources of income have different timing characteristics Government grants – may be awarded annually but may not actually be paid for several weeks after award Donations – cash donations are often received immediately Pledges – a pledge is a promise to make a donation in the future. –To some degree, the exact time by which the donor makes the payment is dependent on them. –Historical analysis can help us anticipate payment patterns Fees for service are usually paid when or just after service is provided Endowment interest is paid monthly or annually

6. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Forecasting Outflows Different kinds of expenses and outflows have different timing characteristics as well Rent and Utilities – usually due monthly Salaries – usually due bi-weekly or monthly Fundraising expenses, Fuel and supplies - may be purchased as needed Interest – usually due monthly Taxes – usually due monthly, quarterly or annually

7. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Anticipating Inflows and Outflows To some degree, anticipating the inflows from grants, endowments and fees for services are straight forward. –Usually grants are scheduled or driven at the discretion of the granting organization –Endowments pay interest on a defined periodic basis (annually) –Fees for service (daycare tuitions, etc) are paid when the service is provided Similarly, it is reasonably straight forward to anticipate most outflows. Again, –Rent and Utilities – usually due monthly –Salaries – usually due bi-weekly or monthly –Fundraising expenses, Fuel and supplies - may be purchased as needed –Interest – usually due monthly –Taxes – usually due monthly, quarterly or annually

8. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Anticipating Donations and Pledges Anticipating donations and pledges can be a bit more engaging –The process breaks down to an analysis of the agency’s fundraising plans and how much it feels it can stimulate pledges and donations from the fundraising activities –Donations and pledges analysis is very similar to sales forecasting in a for-profit company

9. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Anticipating Payment of Pledges Lets say your organization hosts a fundraising event where you gather a number of donations and pledges. Typically we define donations and pledges as follows –Donations – cash paid on the spot to support the agency –Pledges – a promise to donate funds by some date in the future Anticipating payment of donations is trivial. If you can forecast how much the agency will generate in donations, then the cash flow from donations is also forecast Pledges is a bit more difficult as it is up to the donor to determine when the actual donation comes To try to anticipate when pledges get paid, accountants perform an aging analysis. –The details of this process are covered in a future module.

10. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Anticipating Payment of Pledges While the details on how to carry out an aging analysis are in a future module, we can assume the results of an analysis for the sake of illustration here An aging analysis will likely produce a historical payment pattern like: –60% of all pledges are paid within 30 days of offer –30% of all pledges are paid within 60 days of offer –The remaining 10% is paid within 90 days Note that even after fundraising activities, the fundraisers may be required to follow up with donors to recover payment Note that a very realistic possibility is that after 60 days, the pledge may be forgotten about

11. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Anticipating Payment of Pledges With this info, lets assume the total pledges received from recent fundraising activities totals $100000 Therefore we can anticipate cash inflows from pledges as: –$60000 within 30 days –$30000 within 60 days –$10000 within 90 days This would be a way to forecast pledges that are paid. Additionally, the organization might host a number of fundraising events over the year, each generating their own anticipated future pledge payments

12. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Completing the Cash Flow Analysis A cash flow analysis becomes summation of all the individual analyses for each type of inflow and outflow Its best to understand the analysis with an example….

13. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Variance Analysis Once the cash flow analysis is complete, a table of inflows and outflows from each source can be created. The addition of another column in the table provides a place for the accountant to place actual cash flows for each type Finally, the addition of a third column allows the accountant to take the difference between the forecasted and actual amounts to determine how the actual varied from the forecast

14. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP Example Forecast figures come from the cash flow analysis The Actual column is there for the accountant to enter the actuals for each source of inflow or outflow for the month The variance is the difference between the Forecast and Actual

15. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP