~ by Nehal S
1. The Importance of Budgeting
A lot of organizations feel quite helpless when they find themselves running out of cash. The truth is, a lot of cash management is completely in your control, if you are budgeting well. As you prepare for a round of fundraising or submitting a grant funding proposal, look at the types of expenses you’ve incurred in the past years and build a budget on those and other expense types you expect to incur.
The first thing before working on a budget is thinking about your mission and what you want to achieve. Will your numbers realistically allow your envisioned KPIs to manifest over the next few years? This is what most investors and donors are looking to affirm when they look at your budget.
Budgeting tips as you get started on this year’s budget!
1) adjust salaries, services, and goods for increased inflation in the countries you operate (these are predicted and available online)
2) think about replacement costs of IT and other assets that are no longer serving their purpose
3) safeguarding accruals amounts for severances and other large payouts that might drastically increase the amount of cash needed in a particular period
4) have a contingency amount in place for unforeseen costs that are beyond your control
2. Controls, controls, and more controls!
Let’s assume you budgeted as well as you could, and you find yourself still running out of cash faster than you thought you would. How do you stop the bleeding? The answer is through implementing controls along all your processes that need cash. This is not just about the person who approves expenses along strict budget lines (though this person’s job is crucial), but also the requester of the expense – every person in the organization needs to follow strict guidelines on what they can or can not request as an expense to further their work.
3. Strong Procurement Practices
Another aspect of cash management is procurement. Do you have procurement practices which ensure that every dollar, shilling, or franc is being expended in the most efficient manner? A lot of startups and SMEs think of procurement as a non-key function and do not incorporate best practices until later – this is a definite mistake. You want to start thinking about your procurement process at the budgeting stage and getting in those competitive quotes that are going to give you the best value for money.
4. Investment opportunities with low risk financial products
At times people forget that the easiest way for cash to generate more cash, apart from the obvious customer revenue, investors, and donors, is the cash that is sitting in your bank account. When you reach a point of cash stability and you do have some surplus, think about what is the best use of these funds. The first point of action is to reinvest this in your business by upgrading your current tech, resources, etc. but after you’ve done so, and you still have money sitting around which is not going to be used – Invest it!
The word “investment” tends to scare a lot of people. It doesn’t have to – there are several low risk financial products you can invest in to grow your capital over the years. Don’t be afraid to seek out these options, keeping in mind rates of return as well as payout timelines.
B. Cash Management specifics for Non-Profits
Cash management best practices for nonprofits are even more essential to adopt because of reporting requirements to public and donor entities.
1. Project finance management
> The first thing you want to do when it comes to project finance management is separate out donor funds for each project so that they don’t get mixed into the same pool. A lot of accounting softwares are able to segregate these through “Class” options, but if your budget allows – just get another bank account because this will enable you to track your cash by project in a seamless way.
> Project finance management can be overwhelming for nonprofits because instead of managing a single company wide set of financials, you have to treat each project as its own mini-company and track funds for each line item within those budgets. Don’t worry – this is very doable with the right coding system, process, and controls.
2. Donor currency -> Local currency exchange rate implications
> We often forget how much money can be lost (or gained) when converting currencies. You should be able to do some research ahead of time and safeguard any losses by agreeing the reporting rate with the donor upfront and including FX losses and gains as a budget line based on the reporting rate.
3. Overheads
> Overheads are general, or shared expenses that apply company wide and cannot be traced back to a single unit / department. Understanding what your annual overhead is critical to cash management because you want to split this number across all your donor projects as a percentage, to ensure that you are covering your overhead costs. What happens if a donor project gets canceled? It would mean you would need to increase the overhead % allocated to other donors to make for this one project’s cancellation. You want to safeguard yourself to not get into an overhead deficit because this really ends up hurting a lot of managerial / support functions.
4. Ownership of project assets at the end of the project lifecycle
> Last but not the least, upfront negotiations with donors on matters such as who owns project assets at the end of the project lifecycle, can also help save your organization a ton of money.
Work with Nehal S
“Solving niche challenges Founders face”.
Illustrator: Lisa Williams (Instagram: @artist_llw)