“We won’t be able to make payroll in six weeks,” a first-time executive director shared with me in a recent conversation. I had been in those shoes my very first day as an executive director 13 years ago. Having experienced the riptide of a cashflow crisis myself, I was grateful to those who advised me in successfully navigating the challenge. Now was the time to “pay it forward”.
The executive director was smart to recognize the upcoming cashflow crisis and seek advice several weeks before the organization would be unable to make payroll because acting early gives an organization the most options. We discussed the following effective techniques to manage a cashflow crisis.
Take a deep breath and stay calm throughout this process. If the leader panics during a crisis, everyone else does too. With your most zen-like qualities guiding you, develop a cash flow projection to determine exactly how much cash you need every week. Once you know the amount needed in the bank every Monday morning, create a plan to ensure these funds will be available. The plan will likely include initiatives that:
Who owes you money?
The first step in managing cash flow is to review the accounts receivable report and make every effort to collect those past-due invoices. Do not hesitate to call and email fee-for-service clients and government agencies about invoices issued over 30 days ago. In each conversation, ask for a date by which payment will be made and offer to pick up the check.
Ask board members to accelerate giving
Assuming each board member makes an annual financial pledge to the organization, the board chair can ask members to pay their pledges now instead of waiting until the end of the calendar or fiscal year.
Solicit major donor prospects
Typically major gifts is a “long game” that requires cultivation over a period of months and in some cases years. When a nonprofit needs cash soon, however, the best option is to ask individuals with the capacity to make a major gift since foundation requests, government grant proposals, and special events are often unable to generate cash quickly.
Think about prospective major donors you have already cultivated. Perhaps without even calling it “cultivation,” you shared the work of your organization, personally invited them to events, and sent them email updates. Now is the time to build a list of these prospects and schedule personal visits to discuss their support of the organization. In person solicitations are essential and always more effective than phone, letter, or email.
When meeting to solicit the prospect, neither hide the financial difficulties nor emphasize them. After all, you aren’t asking them to “fix” your cash flow, but are instead giving them the opportunity to support the important work of your organization.
Ask funders for a bridge loan
Since institutional funders can take 45 - 60 days to pay an invoice, they will often extend a bridge loan if the organization asks for one. If the cash flow crisis is caused by slow payment from an institutional funder, share with the funder exactly how the delay impacts services when requesting a bridge loan.
Talk to your banker
Talk to your banker about obtaining a line of credit if your organization has collateral (such as a building) and can demonstrate that the root cause of a cash flow issue is not actually a lack of funding.
As an aside, access to financial expertise and a line of credit are good reasons to bank with a smaller, locally-owned bank. They will build a relationship with you and may even consider extending a line of credit based on your organization’s funding contracts even if it doesn’t have collateral. While executive director of one organization, I built a relationship with a smaller local bank and obtained a $100,000 line of credit without any real estate as collateral. As our banking relationship strengthened and budget grew, the line of credit increased to $250,000 without any real property as collateral.
Use a credit card’s float
If your agency has its own credit card, it can “float” some expenses for 20 to 30 days before the credit card payment is due.
Cautionary note on credit
Always remember it is both risky and irresponsible for an organization to borrow funds without knowing exactly how the loan will be repaid.
Defer major expenses
Even if the organization budgeted new equipment, a renovation, or staff raises, postpone those expenses until cashflow is stronger.
Determine an order for paying vendors
You might, for example, be able to defer payment of a utility bill for 45 days without dire consequences, while an unpaid database subscription may immediately shut down an essential tool.
Once you’ve determined an order for paying vendors, communicate with each vendor that might be paid late. Apologize, explain the situation, and make a good faith effort to pay by the date promised. You will feel less guilt about paying late, and they will likely be more understanding.
Breath, Plan, Communicate
While the process of managing a cash flow crisis can be stressful, your calm, planned, and transparent response will help your organization weather the storm.