1. Presented by Kate Barr, Nonprofits Assistance Fund
Managing Cash Flow
Presented by
Kate Barr, Nonprofits Assistance Fund

2. Session objectives Strategies for managing cash flow
The importance of proactive cash flow management
Cash flow projections
Understanding working capital
Analyzing working capital needs
Learn from your peers

3. Part I
Cash Flow Projections

4. The importance of monitoring cash flow
Cash flow is the fuel that sustains organizations and programs
Cash flow shortfalls are disruptive
Cash flow shortfalls are costly

5. Monitoring cash flow
Recognize the difference between negative cash flow and deficits
Essential principles of managing cash flow:
Project and anticipate
Prepare options and strategies
Respond and adjust to changes

6. Projecting cash flow When to prepare cash flow projections
Cash flow management philosophy
Base line cash balances
Use of credit lines
Use of restricted grant funds
Projecting uncertain income

7. Projecting cash flow Start with reliable budget information
Understand contract and grant terms and experience
Understand operating cycles – payroll, contracts
Include cash required for capital purchases and debt service

8. Preparing projections
Level of detail by line item
Time periods for projections
Use of projections – management, board, outside users
Provide training for users of the projections
Frequency and level of updates

9. Projecting cash receipts
Grant income – committed & uncertain
Restricted and special project funds
Receivables collection
Contract receivables
Individual fundraising
Pass-through funds

10. Projecting cash disbursements
Reflect the anticipated timing of payments – not always divided by 12
Payroll and benefits payment schedules
Seasonal activities
Contracts and agreements with lump sum payments
Debt service and capital purchases

11. Using cash flow projections
What is a cash flow problem?
Anticipate cash flow shortfalls
Advance planning = more options
Clarify roles and responsibilities for addressing projected shortfalls

12. Strategies for cash shortfalls
Access operating cash reserves or available credit line
Have a plan for repayment
Speed up cash receipts
Slow down cash disbursements

13. Defining and Analyzing Working Capital
Part II
Defining and Analyzing Working Capital

14. Defining working capital
Working capital is always the first use of cash
Businesses and nonprofits fight a three-front war over the use of their cash:
Fixed assets
Debt service
Working capital
Working capital is the first use of cash because a business or nonprofit cannot operate without inventory or service providers

15. Defining working capital
Seasonal working capital
Temporary financing needs tied to the business cycle or specific contracts
Financing rests during off season
Permanent working capital
Longer-term investment to finance steady growth over a period of time
Depends on proven pattern of sales or revenue growth

16. Defining permanent working capital (PWC)
Permanent investment of cash into operating assets and liabilities required to support revenues
Accounts receivable
Inventory
Accounts payable
Accruals

17. PWC formula Accounts Receivable + Inventory - Accounts Payable
Accruals =
Permanent Working Capital

18. Measuring PWC Amount of PWC is determined by three factors:
Operating cycle(s)
Revenue levels
Rate and/or timing of revenue growth

19. PWC and the operating cycle
Length of time, measured in days, that cash remains in operations before turning back into cash
Known as the cash-to-cash cycle
Determined by:
Industry norms
Management capacity
Economic and market conditions
Policy considerations

20. Theoretical operating cycle
Receivable terms +
Inventory cycle -
Supplier terms
Payroll cycle =
Theoretical Operating Cycle

21. Actual operating cycle
Days receivable +
Days inventory -
Days payable
Days accrual =
Actual Operating Cycle

22. Variations in operating cycles
Community Health Center
Nonprofit organization
Days accounts receivable
Days grants receivable -
Days payable
Days accrual =
Operating Cycle

23. Types of business operating cycles
Long
Health Center
Short
Childcare
Negative
Restaurant
Days receivable
120 45 +
Days inventory 20 3 -
Days payable 30 21
Days accrual 14 7 =
Operating cycle 96 25
(34)

24. Comparing PWC needs: Revenue of $1 million
Health Center
Childcare
Restaurant
A/R
$325,000
$123,000
$ 0 +
Inventory
5,000
6,000 -
A/P
25,000
18,000
58,000
Accruals
30,000
27,000 =
PWC Needs
$275,000
$ 75,000
$(79,000)

25. Rule 1 of PWC analysis
The longer the operating cycle, the more difficult it is to grow.
While the health center must invest 96 days, or $ 275,000 to support revenue, the childcare center invests only 25 days of cash, or $75,000.
The restaurant do not invest any cash in operations—they use other people’s money.

26. Rule 2 of PWC analysis
Financing one day of Accounts Receivable takes more cash than one day of inventory.
Receivables include the full value of all costs and require more cash to support than other assets.

27. PWC and revenue level
Businesses and nonprofits with positive operating cycles need more PWC for every increase in revenue
If the Health Center’s revenue doubled to $2 million, and the operating cycle stayed the same, PWC needs would increase to $550,000.
Impact of revenue growth can be moderated by improved control of the operating cycle—as long as it improves for the right reasons (i.e., faster collections not slower payments).

28. PWC and rate of growth
Businesses and nonprofits experiencing rapid growth syndrome face most serious problems financing PWC (if have a positive operating cycle)
Need for PWC grows faster than a company or nonprofit can convert profits or surplus into cash.
Sometimes gap can be filled only by equity or grants to lower the financial risk inherent in rapid growth.

29. Planning Working Capital Needs
A step beyond managing cash flow
Plan the operations and policies for all working capital components
Analyze the costs and opportunities of different working capital scenarios

30. Step 1: Calculate existing PWC on the balance sheet.
Accounts receivable +
Inventory -
Accounts payable
Accruals =
PWC
All nonprofits except startups have an existing investment of PWC quantified on their balance sheet. New PWC is the difference between existing and projected PWC needs.

31. Step 2: Determine key assumptions for PWC projections.
Use most recent trends.
Determine six assumptions.
Rate of revenue growth
Direct Costs/Revenues
Days receivable
Days inventory
Days payable
Days accrual

32. Example : Change Receivables Cycle
Current
Longer
Shorter
Days receivable
120
180
100 +
Days inventory 20 -
Days payable 30 60
Days accrual 14 =
Operating cycle 96
126 76

33. Example : Change Receivables Cycle
Current cycle
Longer
Shorter
A/R
$325,000
$487,000
$271,000 +
Inventory
5,000 -
A/P
25,000
50,000
Accruals
30,000 =
PWC Needs
$275,000
$ 412,000
$221,000

34. Step 3: Project growth by using reverse operating cycle equations
Days rec/360
X projected revenue
= Accts. Receivable
Days inv/360
X projected COGS
= Inventory
Days pay/360
= Accts. Payable
Days acc/360
= Accruals
New PWC

35. Step 4: Subtract existing PWC from projected PWC needs.
$New PWC Needs -
Existing PWC Investment =
$PWC to be funded or financed

36. Managing working capital
Understand the operating cycle
Identify the controllable factors
Manage all factors in the cycle
Calculate the costs of working capital
Strategically invest in shortening the operating cycle
Communicate with management and board leaders