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Cash Flow Management in Charities


By ISCA (republished) On 14 Mar 2017


This article was first published in the IS Chartered Accountant, March 2017. Re-published with permission from the Institute of Singapore Chartered Accountants (ISCA).

IMPORTANCE OF CASH FLOW IN CHARITIES?

Charities rely on the public, corporate donors, government and other organisations for funding to carry out their charitable activities. The bulk of their funding, such as grants, donations, and income from fundraising, are not provided on a regular basis.

Due to the ad hoc nature of Charities’ funding, their cash flows can be challenging to predict as they typically fluctuate throughout the year. A shortage of cash, even if temporary, is a major risk factor for Charities.[1] Therefore, Charities must pay close attention to whether they have enough cash reserves to be able to continually provide services to their beneficiaries[2], while relying on incomes that are inherently unpredictable

CHARITIES' INCOME SOURCES

Sim, Ghoh, Loh and Chiu (2015) studied the sources of income of 202 Institutions of a Public Character (IPCs) in Singapore’s Health, Social and Welfare sectors from FY 2011 to FY 2013. They found that large IPCs with total operating expenditure of S$10 million and above received the bulk of their income from government grants (around 45%), and other major sources included donations and fundraising income (around 23%), and programme income (around 21%). Whereas for IPCs with total operating expenditure of S$250,000 and below, the bulk of their income (up to 65%) came from donations and fundraising, with government grants and programme income contributing up to 20% and 12% respectively.[3] Besides income from donations and fundraising, government grants and programme fees, Charities may need to rely on income from other sources, such as investment, social enterprise and sponsorship, to cover their operating and other expenditures.

UNPREDICTABILITY OF CHARITIES' MAJOR INCOME SOURCES

With a good understanding of the cash flow characteristics of the three major income sources – donations, grants, and programme fees – accountants can help Charities develop strategies to address their cash flow challenges.

Most donors contribute to Charities on an ad hoc basis.[4] They may make pledges of support that may not be received until a later date. Some donors may reduce contributions due to changes in their business or personal circumstances. Some may attach conditions and timing restrictions on the use of the funds donated to the Charities. They may designate their contributions for specific purposes or programmes, which means that the cash might not be available to cover the recurring operating expenses, as well as other unanticipated expenditures. Charities need to understand and accept the ad hoc nature of cash flow from donors as it will affect the Charities’ cash flow planning and management.

According to Dropkin (2003), grants from both government and private sources may be disbursed for general use or specific activities. Charities have to meet the requirements outlined in grant agreements, which may also affect their cash flow planning and management. However, grants may stop due to business or economic circumstances, such as policy changes. Therefore, a thorough understanding of all grant conditions is important for Charities.[5]

Programme fees are another important source of Charities’ income. Charities normally charge a small fee for providing goods and services to their beneficiaries. Often, these fees do not cover the full cost of operating their programmes or services. Instead, the cost of running the programme is subsidised by the Charities’ other sources of income, such as grants, donations and fundraising income, which are inherently unpredictable in nature. Charities have to run their programmes or services, even if the cost of running them cannot be defrayed. Therefore, to ensure the sustainability of the Charities’ operations, there is a need for Charities to have effective cash flow management.

EFFECTIVE CASH FLOW MANAGEMENT THROUGH FORECASTING

Good cash flow projections provide early warning system to Charities.[6] Cash flow forecasting is a projection of the Charity’s future financial situation; it allows Charities to see when money is expected to be received and spent[7]. An accurate, detailed cash flow forecast, especially when used in conjunction with a detailed operating budget, will allow Charities to anticipate potential cash flow difficulties and quickly take effective remedial step.[8]

It is easier to address cash flow issues if they are anticipated early. An effective way for Charities to manage cash flow is to develop a cash flow projection for 12 months. Charities should also review and update these projections regularly. In Box Story 1, Leung Yee Ping, Executive Director, Young Women’s Christian Association (YWCA) of Singapore, shares her organisation’s best practices in cash flow management. Besides the development of cash flow projections, these include good governance to facilitate the visibility, as well as exercising tight control over both income and expenses.

 

BUILDING RESERVES IN CHARITIES

As a hedge against income uncertainty, Charities should build up their operating reserves to maintain their financial flexibility and management of cash flow. Without an operating reserve, Charities may have difficulty responding to temporary changes in their environment or circumstances, such as delayed payments or cutbacks in funding from government agencies or donors.[10] Charities facing cash flow distress may not have the resources to continue delivery of its programmes.

There is, however, a thin line between having the right amount of cash in reserve to prevent cash flow deficits and stockpiling too much capital.[11]. Many Charities argue that some donors may not want to contribute to Charities with too much accumulated wealth, as these donors may prefer to have their donations expended currently, rather than saved for subsequent fiscal years.[12] Some Charities have lower amounts of cash reserves as they anticipate that the government will provide additional financial help during difficult economic times.[13] For these reasons, some prefer to hold lower reserves to continue to attract current and future donations.[14] Unfortunately, such strategies may compromise the long-term financial sustainability of Charities. Accountants can therefore help Charities and funders to understand the importance of building sufficient reserves for their sustainability.

CONCLUSION

For Charities to remain sustainable, good cash flow management is important. It builds public and donors’ confidence, as the funds donated to the Charity will have a lasting impact.[15]In an operating environment with income unpredictability, Charities have to manage their finances well to continue providing for their beneficiaries. By building reserves, Charities will have sufficient funds to meet unexpected expenditures.

Charities are required to account for their reserves. They need to manage their reserves for the best returns, taking into account appropriate risks and donors’ wishes. Accountants can help Charities with the forecasting and management of cash flow, as well as in the building of their reserves.

We will discuss Charities’ reserves management in the next article.

Dr Isabel Sim is Senior Research Fellow, Department of Social Work, Faculty of Arts and Social Sciences, National University of School (NUS) as well as Director (Projects), Centre for Social Development (Asia). Associate Professor Alfred Loh and Professor Teo Chee Khiang are both from the Department of Accounting, NUS Business School. The writers gratefully acknowledge the contributions of Gong Yuan, Persa Chowdhury, Claribel Low and Koh Luwen, Research Interns, NUS.


[1] Malki, E. (2016). “A Simple Model for Cash Flow Management in Nonprofits”; https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2732052_code42782.pdf?abstractid=2732052&mirid=1&type=2

[2] Blackbaud. (2011). “Financial Management of Not-For-Profit Organizations”; https://www.blackbaud.com/files/resources/downloads/WhitePaper_FinancialManagementForNPO.pdf

[3] Sim, I., Ghoh, C., Loh, A., & Chiu, M. (2015) “The Social Service Sector in Singapore: An Exploratory Study on the Financial Characteristics of Institutions of a Public Character (IPCs) in the Social Service Sector”; www.fas.nus.edu.sg/swk/csda/y1reportfinal.pdf

[4] Goy, P. (2016) “Most firms give to charity but many on ad hoc basis”, The Straits Times; www.straitstimes.com/singapore/most-firms-give-to-charity-but-many-on-ad-hoc-basis

[5] Dropkin, M. (2003) “Improving Cash Flow Management In Challenging Times: A Primer”;  https://nonprofitquarterly.org/2003/06/21/improving-cash-flow-management-in-challenging-times-a-primer/

[6] Dropkin, M. (2003) “Improving Cash Flow Management In Challenging Times: A Primer”; https://nonprofitquarterly.org/2003/06/21/improving-cash-flow-management-in-challenging-times-a-primer/

[7] Hoermann, P. (2014) “Cash-flow Forecasting in Non-profit Organisations”; http://180dc.org/cash-flow-forecasting-in-non-profit-organisations-necessity-components-insights-patrick-hoermann/

[8] Dropkin, M. (2003) “Improving Cash Flow Management In Challenging Times: A Primer”; https://nonprofitquarterly.org/2003/06/21/improving-cash-flow-management-in-challenging-times-a-primer/

[9] YWCA Annual Report 2016; www.ywca.org.sg/wp-content/uploads/2016/04/YWCA-AR2016-low-res.pdf

[10] Nonprofit Operating Reserve Policy Toolkit Workgroup (2010) “Operating Reserve Policy Toolkit for Nonprofit Organizations; www.nccs2.org/wiki/images/d/df/Operating_Reserves_Policy_Toolkit_1st_ED_2011-07-28.pdf

[11] Barned, J. (2009) “Financial Management of Not-for-Profit Organisations”; https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/notforprofit/financial-management-nfp-organisations.pdf?la=en

[12] Marudas, N. P. (2004) “Effects of Nonprofit Organization Wealth and Efficiency on Private Donations to Large Nonprofit Organizations”, Research in governmental and nonprofit accounting, 11, 71-92.

[13] Handy, F., & Webb., N. J. (2003). A Theoretical Model of the Effects of Public Funding on Saving Decisions by Charitable Nonprofit Service Providers. Annals of Public and Cooperative Economics 74(2): 261-282.


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