Cash Flow

May 1, 2009       Mike Patterson      

Whenever a four-legged friend is adopted from the animal shelter in San Antonio, Texas, Executive Director Kathryn L. Bice counts on it being a win for the new owner and the pet but a money-losing proposition for the agency.

Like many nonprofit organizations, the Humane Society of Bexar County faces a yawning gap between the actual cost of providing products and services — in this case, animal adoptions — and the revenues they generate.

At the Humane Society, for example, pet adoption fees range from $25 to $125 while the actual "investment in each animal vary from $25 to $500, sometimes more, plus overhead for staff, animal care and administration," Bice said.

The revenue versus expense hole is only the tip of the cash flow icebergs charitable organizations must negotiate to keep their doors open throughout the year. While most for-profits can anticipate a source of revenue year-round, charitable agencies must manage cash flows that range from periods when they are flush to times when they receive little or no revenue, a balancing act that can create enormous stress and anxiety in non-profit administrators.

Charities that depend on grants and donations, for instance, face not only the uncertainty over the amounts they might receive from funders but whether they will receive anything at all.

"We may budget to receive donations and grants but who can be sure that most of the agency grant requests will be funded," Bice said.

As an example, the Humane Society had enjoyed consistently strong financial backing from one funder, when it unexpectedly redirected much of its support to a spay-neuter clinic from the Society’s animal shelter program, Bice said.

Sharing this assessment of funding uncertainties is Dr. Kirsten A. Gr¿nbjerg, the Efroymson Chair in Philanthropy at the Center on Philanthropy at Indiana University and author of Understanding Non-profit Funding: Managing Revenues in Human Services and Community Development Organizations.

"Private donations in general tend to be lumpy" because foundation grants may not always be repeated, she said.ÊAnother problem is the time span between when a proposal is submitted, when it is approved and when the charity actually receives the money.

Research conducted for her book also found that government funding sources rarely approve proposals or finalize contracts before the start of the program period. In some cases, proposals were not even approved until the agency was well within the program period.

"As long as funders have not finalized grants and contracts, organizations cannot lay legal claim to the funding," she wrote. While waiting to finalize the contracts and receive the funding, organizations still must maintain the program services, pay rent and meet payroll to comply with the requirements of the grants. "This presents a cash flow problem," she wrote. G

r¿nbjerg also suggested that nonprofits monitor funders to ensure the agency is aware of any changes in the funding environment in addition to continually identifying and soliciting new sources of revenue.

Another cash flow problem occurs when there is a difference between the amount originally requested in a funding proposal and the amount actually paid out. In a study of 78 government funding proposals averaging $67,300, Gr¿nbjerg found that an average of $18,000 was cut from the requested amounts. The cuts ranged from as large as 76 percent to as small as 3 percent.

The impact was even greater when agencies factored in the interest they lost from cuts in funding. These losses ranged from $2,200 and $7,100 a year in interest alone. "This may seem to be a relatively small amount," she wrote, "but it is equivalent to annual surplus or deficit levels" for several agencies.

The type of funding that an agency receives also affects cash flow. "Clearly, organizations that rely on special events are likely to have lumpy cash flows," she said. This is caused by numerous factors, such as weather, volunteer issues or political events that "may throw a monkey wrench" into the event, "regardless of how well you plan it," she said.

"Organizing special events is an exercise in the management of uncertainty," she wrote.

Agencies that rely heavily on special events "must buffer themselves from large fluctuations in revenue" by diversifying their resource base and avoiding an excessive reliance on special event funding, she suggested.

Even public funding, once a staple for many social service agencies, is getting more difficult. She said public funding is more performance related now and that many agencies now must deliver services before they get paid. This requires nonprofits to maintain extensive record keeping of the services and the clients served. In many cases, gifts to nonprofits may be restricted for specific projects or parts of the operation, requiring managers to carefully plan their cash flows to ensure that all necessary areas are provided for in budgeting.

"We may get revenue or gifts for medical rescue and animals sick or injured and not get significant funds for healthy, orphaned pets or repair and maintenance," the Humane Society’s Bice explained.

Nonprofits have developed different techniques to handle the ebb and flow of revenue and the rough waters of fundraising.

"Much like businesses, some nonprofits reduce services to balance income and expenses," Bice said. "For example, hours for service may be unavailable on Sundays, evenings or weekends or a specific weekday."

Gr¿nbjerg found that some organizations "used staff turnover to deal with cash flow and other budget problems. In some cases, organizations had to fire staff or delay salary payments when grants were reduced or cut altogether. In other cases, organizations exploited staff resignations," including leaving positions vacant to curtail expenditures.

Bice warns that this strategy can also be costly in the long-term. "Extreme staff turnover is a hidden expense in continuity issues, training and level of service," Bice said. "Continuity of staff is critical to management and fundraising."

Nonprofits relying heavily on private donations can often expect periods when gifts slow to a trickle, such as summer. To offset this annual slowdown, they may generate other sources of revenue by offering programs such as camps and other events.

The Humane Society, for example, sponsors Camp Humane, an education program for youth in the summer. "The fees generate much needed revenue in a sometimes slow donation period," Bice said.

Bice said the San Antonio shelter is fortunate because many parts of its operations can be run "just like a business, with fees for service" and revenue projections based on the agency’s history and "strong customer relationships."

Another way to maintain a consistent cash flow is to seek partnerships with major funders that might be looking for community collaboration and that can give "synergy and metrics to solving a significant problem," Bice said.

Endowments can also help ensure a seamless cash flow year round. "Some nonprofits have endowments or portfolios that provide much needed leveling via income transfers during slow months," Bice said. "Our portfolio has historically supported our business model to be adoption guarantee, meaning that we keep a healthy adoptable pet until it is adopted. Our portfolio is that animal’s safety net."

To build the endowment and a financial cushion, Bice encouraged charities to transfer some or all of the planned gifts they receive to an endowment fund "for a rainy day."

She also suggested that nonprofits "focus more on structured and planned fundraising and less on community outreach, special events and friend raising that cost money and precious personnel time."

In San Antonio, the Humane Society has turned its newsletters into a revenue generating mailing. In 2005, Bice said, the Society went from losing $5,000 per newsletter mailing to now netting $35,000 per mailing with the help of a mail house knowledgeable about newsletter methodology.

They also use the newsletter to create a "non-event." The "No Ball at All" makes as much as an event that would take hundreds of man-hours to organize and execute, she said. She also plans mailings throughout the year. "We plan a variety that are fun and offer different things to different audiences," Bice said.

"Plan, plan, plan," advised Marion Lee of Bacon Lee & Associates, a San Antonio-based consulting firm specializing in charitable resource management.

"Nonprofits rarely budget more than a year in advance," she said. "To secure cash flow, they have to forecast at least a year in advance, if not three years. The forecast should have a built-in ‘what if,’ particularly if they are dealing with a revenue system that could be affected by the loss of a long-time donor through death or disinterest, change in the economy or a political election, which always affects funding, or if they are too reliant on one stream of revenue."

Lee also suggested that organizations look back at their history. "Organizations and funders have trends," she said. "Summer funding is usually slow. Donors are out of town, office staff is on vacation and cash flow will slow down or be late in arriving. They need to look at the trends in the funding over at least three years in arrears so that they can predict the slow times." "Nonprofits also get into a trend of how they spend their money. Events, insurance, renewal of contracts with vendors happen at specific times of the year, so look back and see when they have large outlays and put funds in reserve," she said.

"Needless to say, develop a reserve fund for those cash flow pinch times. It will tide you over as long as you make sure that you pay it back," she added.

"Even in tough times, we have to get back to basics," said Joyce Penland, also of Bacon Lee & Associates. "Being donor-centered, strategically planning for the highs and lows of the calendar year, using past years’ history as a guide for future years’ planning. This is still important and too often small nonprofits get caught in a real bind when gifts don’t happen ‘when they’re supposed to.’"

She said nonprofits need to remember that fundraising follows a natural cycle. "Many donors are out of pocket during the summer and most nonprofits will see a spike when children go back to school and we all get back into the swing of things," she said. "Even nonprofits not related to education experience this peak."

She urged nonprofits to plan for these natural down times "so that they are not constantly playing catch up."

"If we do good, proper strategic planning," Penland said, "then we can avoid the stressors of cash flow." NPT

Mike Patterson is associate vice president of planned giving for the Arthritis Foundation and a freelance writer based in San Antonio, Texas.