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Tracking and managing finances is incredibly important for any organization—even a nonprofit one. Part of minding finances as a nonprofit is engaging in effective cash management. Fortunately, there are some practical strategies that nonprofits can follow to optimize cash management and boost their impact with each dollar saved.

The Importance of Cash Management in Nonprofit Organizations

Why does cash management matter, anyway? This essential business practice allows nonprofits to look more closely at their cash flow to make sure that there is plenty of funding for everything from day-to-day expenses to unexpected events.

With excellent cash management strategies in place, nonprofits can gain better insights into how finances are looking while minimizing the risk of missed payments, deficits or other detrimental events.

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Tips for Improving Nonprofit Cash Management

With a better understanding of why cash management matters, nonprofits without a detailed cash management strategy in place should make it a priority to create and implement one. Fortunately, there are several tips that nonprofit leaders and financial specialists can follow to improve cash management practices.

Take Advantage of Idle Cash

First, it's a good idea to take a closer look at the overall financial status of the organization. This includes assessing balances in all bank accounts to determine how much idle cash the organization has access to at any given time.

From there, investing some of the extra money into high-yield savings accounts, low-risk investments (such as money market funds) can help accumulate interest that adds up over time.

Diversify Funding Sources

Another important tip to keep in mind when managing finances at a nonprofit is to secure funding from multiple sources rather than relying on just one or even two sources. This way, if a donor drops out for any reason, the organization will still have enough funding to continue without operations being significantly affected.

Set Up a Robust Reserve Fund

Unexpected expenses can arise at any time—and when they do, it's critical that a nonprofit organization is able to cover them without needing to take out additional funding. Ideally, this means having a robust reserve fund that accounts for unexpected expenses and even short-term cash shortages.

With a reserve fund in place, nonprofit leaders can enjoy the peace of mind in knowing that there's enough of a cash cushion to cover large expenses as they arise.

Keep an Eye on Cash Flow

Often times, nonprofit organizations have a great deal of money moving around at any given time. From donations coming in, to outgoing expenses, it can be hard to get a true feel for the organization's finances with so much happening all at once. This is where it can be helpful to have a means of monitoring cash flow through the use of budgeting software or similar applications.

With a closer eye on cash flow and recurring income/expenses, it is possible to get a more accurate idea of how much is being brought in versus spent every month. From there, it may also be possible to create and stick to a budget that keeps the financial health of the organization at the forefront. Many nonprofits use accounting software that is specifically designed for nonprofit organizations, so this is something to consider.

Put It in Writing

As decision-makers determine investment objectives, tolerance for risk and other strategies for optimizing cash management, it's important to put this all in writing so that others within the organization understand the cash management policy and its best practices. All decision-makers within the organization should also have access to a copy of the cash management policy.

Of course, cash management policies can change and evolve over time as the needs of the organization change. When this occurs, it is important to update the master document and ensure that everybody has the latest copy to avoid confusion.

Time to Consult with a Professional?

Creating a cash management strategy for a nonprofit doesn't have to feel like an impossible task, but it does require a basic understanding of the organization's financial standing and other accounting concepts.

Many nonprofits end up consulting with financial advisors or wealth advisors as a means of strategizing their cash management policies, so this may be something to consider for nonprofits that are in need of further guidance. From there, an experienced advisor can look at the organization's “big picture” and ensure that its cash management policies are aligned with its overall mission, values and goals.

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