5 Steps in a Nonprofit Cash Crunch

Facing financial challenges as a nonprofit leader is tough, and identifying the real issues can be confusing. But there are simple steps you can take to prepare and pinpoint the problems. Here are five key steps to manage your cash flow and keep your nonprofit on track. If things get too complex, don't hesitate to bring in the experts.

To dive deeper, watch our webinar recording, "Nonprofit Resilience: A Roadmap for Success in Uncertain Times," and explore our Resilience Roadmap, filled with insights from nonprofit accounting, finance, legal, and organizational management experts.

1. Understand Your Financial Situation

To make informed decisions, you need a clear picture of your nonprofit's financial situation. Start here:

• Know your fund types: Donor-Restricted, Board-Designated, and Unrestricted
  Some funds come with specific usage requirements, which can limit your financial flexibility. Waiting until year-end to understand your fund balances isn't an option when cash is tight. You need real-time clarity on what cash you have and where you can spend it.
  
  

• Action Item: Meet with your finance team monthly. Have them report on fund balances and instruct you on how the funds can be spent.
  
  

• Analyze the relationship between cash and net assets
  Dive into your monthly financial statements to understand how your available cash aligns with your financial obligations and restricted funds. This will help you identify any potential cash flow gaps.
  
  

• Action Item: Look at your revenue and expense trends over time on your monthly P&L statement. Are you consistently generating a surplus or deficit? Do you have enough cash on hand to meet your short-term financial commitments, and for how many months?
  
  

• Develop a clear picture of your current financial situation and future outlook
  
  

• Action Item: Put together a 12-month cash flow forecast to predict your ability to cover expenses. Update it monthly as new information becomes available.

2. Cut Costs Without Cutting Impact

When cash is tight, find ways to reduce expenses without compromising your nonprofit's mission. 

• Convert non-discretionary to discretionary expenses
  Instead of committing to long-term lease agreements for office space, consider month-to-month leasing options or ensure that contracts include minimal early termination penalties. Additionally, rather than increasing salaries, consider offering performance-based bonuses.
  
  

• Explore staff contract adjustments
  Consider options like contract-based work, freelancers, or project-specific engagements that provide more financial adaptability. This can help you manage your payroll expenses more effectively.
  
  

• Implement reduced work weeks
  If necessary, consider temporary hour reductions that maintain your team structure while reducing overall payroll expenses. Be sure to communicate openly with your staff and ensure everyone understands the reasons behind this decision.
  
  

• Evaluate benefit reductions during renewal periods
  Carefully review your benefit packages to identify potential cost-saving modifications. However, be mindful of the impact on employee morale and retention.

3. Create New Revenue From Existing Expertise

Nonprofits are diversifying revenue streams. Identify possible earned revenue streams to supplement your funding. Check with your CPA to ensure the income aligns with your mission and would not be considered unrelated business income. 

• Generate income through consulting, training, and workshops
  Transform your organization's knowledge into revenue by offering paid community classes, professional consulting, training programs, or coaching sessions. For example, an early childhood nonprofit could train childcare centers on curriculum development, while an environmental organization could provide sustainability consulting to local businesses.
  
  

• Rent unused office space
  If you have underutilized assets, consider transforming them into revenue-generating resources. Explore short-term and long-term rental opportunities, such as conference room rentals or temporary office subletting.
  
  

• Push your development team to explore new funding sources
  Challenge your fundraising team to think creatively about grants, sponsorships, and innovative funding models. Encourage them to look beyond traditional sources and tap into new networks.

4. Communicate Reality To Your Board and Team

During financial challenges, transparent communication is key to maintaining trust and support from your stakeholders. 

• Inform board members about financial challenges
  Provide clear, honest assessments that enable strategic decision-making. Be transparent about the challenges you're facing and the steps you're taking to address them. Consider developing a risk matrix together with your board to identify, rate, and prioritize potential threats. This collaborative approach helps the board actively participate in creating mitigation strategies rather than just receiving bad news.
  
  

• Engage fundraising staff
  Share cashflow projections with the development team so they can identify timelines for funding
  
  

• Counter overly optimistic perspectives
  While it's important to maintain a positive outlook, it's equally crucial to ground discussions in realistic financial projections and data-driven insights. Be honest about the challenges ahead and the potential impact on your organization.

5. Act Now. Make Decisions Early

To navigate a cash crunch successfully, be proactive and make strategic decisions early on. 

• Address financial trends early
  Don't wait for a crisis to unfold; intervene at the first signs of financial strain. Engage your board in scenario planning exercises to map out potential financial challenges and develop contingency plans together. The earlier you act, the more options you'll have to course-correct and mitigate the impact on your nonprofit.
  
  

• Consider creative staff time-sharing options
  If necessary, allow employees to trade or redistribute work hours based on individual financial capabilities. This can help you manage payroll expenses while still maintaining your team's capacity.
  
  

• Prioritize financial sustainability
  Focus every decision on your nonprofit's long-term financial health. Avoid short-term fixes that may compromise your organization's future stability.

Remember, maneuvering through a cash crunch is challenging, but with the right strategies and a proactive approach, you can emerge stronger and more resilient. Early intervention and strategic planning can turn a financial challenge into an opportunity for growth and innovation.

At Sutro Li, we understand the complexities of managing nonprofit finances, especially during tough times. If you need support or guidance, our team is here to help.