The Statement of Cash Flows: What Does It Tell You About Your Nonprofit?

What the Statement of Cash Flows Reveals

Here are the critical insights that the Statement of Cash Flows gives you about your nonprofit:

Your Nonprofit’s Long-Term Sustainability

Your Statement of Cash Flows reveals your nonprofit’s long-term sustainability by demonstrating its cash-generation ability.

If your nonprofit can generate consistent, positive cash flow from its core mission-related activities (such as receiving donations, grants, program fees, and income from things like sales or rentals), it’s a sign that you’re able to execute on your mission over time without relying on investing or borrowing.

Your ideal cash flow position depends on various factors specific to your nonprofit, such as its size, sector, funding sources, and stage of development.

In fact, negative cash flow is sometimes acceptable if it’s temporary and planned — and when your cash reserves can cover the shortfall. Negative cash flow is often an intentional part of making investments in your growth.

However, consistently negative cash flow or a rapidly deteriorating cash position should raise concerns and prompt action to address the underlying issues. More on this in a bit.

When assessing your cash flow from operations, here are two additional metrics to consider:

• Operating cash flow ratio: You calculate this ratio by dividing net cash from operating activities by your average monthly operating expenses. A ratio of 1.0 or higher suggests that you have sufficient cash from operations to cover monthly expenses. A higher ratio indicates an even stronger cash position and greater financial resilience.
• Months of cash on hand: This is the number of months you could continue to pay expenses using only your available cash and cash equivalents. To calculate this metric, divide your total cash and cash equivalents by average monthly operating expenses. Any nonprofit should aim to have at least three to six months of cash on hand to weather unexpected financial challenges.

Your Nonprofit’s Short-Term Financial Health

Your Statement of Cash Flows reveals your nonprofit’s short-term financial health by demonstrating its liquidity.

Liquidity refers to your nonprofit’s ability to meet its upcoming financial obligations (such as bills or payments coming due) using current assets, and not dipping into reserves. Your current assets are primarily cash and cash equivalents.

Note that liquidity and cash-generation ability are related, but different. Liquidity accounts for cash inflows plus other liquid assets from all sources, including investing activities (such as selling investments), financing activities (such as borrowing money), and core operating activities.

Cash-generation ability, on the other hand, accounts for cash inflows from core operating activities only.

If your nonprofit has a strong cash generation ability, it likely has good liquidity. But not always! It’s possible for an organization to have high liquidity but poor cash generation ability, or vice versa. For example, a nonprofit with significant cash reserves (high liquidity) might struggle to generate positive cash flow due to inefficient processes or unsustainable programming.

Resource Allocation at Your Nonprofit

In your Statement of Cash Flows, the sections on investing and financing activities show how your nonprofit is allocating resources and managing its long-term financial position. This information helps you evaluate your investment and financing strategies and decide whether you need to adjust them.

Here are the various cash inflows and outflows related to investments and financing that you can see on your Statement of Cash Flows:

• Capital expenditures: Cash outflows for purchasing property, equipment, vehicles, or other long-term assets. Significant capital expenditures might be necessary when investing in your infrastructure as part of improving programs or expanding services.
• Proceeds from the sale of investments: Cash inflows from selling long-term investments like stocks, bonds, or real estate. You might see substantial cash inflows when you liquidate long-term assets to fund current operations. But this may also raise concerns about your financial stability.
• Purchase of investments: Cash outflows for acquiring new long-term investments to grow your reserves or endowment funds.
• Proceeds from loans or lines of credit: Cash inflows from borrowing money to finance your operations or capital projects. Cash from loans or lines of credit often indicates that you’re relying on debt to fund operations, which calls into question your cash-generation ability.
• Repayment of loans or lines of credit: Cash outflows for paying back borrowed funds, including principal and interest payments. Evaluating the repayment of borrowed funds is complex. Obviously, borrowing can be a valuable tool for your growth, for bridging cash flow gaps, or for financing capital projects. But repayments can also outkick your cash-generation coverage, as it were. Your strategy, timeframe, and terms here all play a role in whether your borrowing strategy is working for you.
• Receipts from endowment contributions: Cash inflows from donors who contribute to your endowment funds, which provide long-term financial support for your organization. Consistent cash inflows here typically demonstrate that you can attract long-term support and build solid financial reserves.

Potential Operational Issues at Your Nonprofit

By comparing your Statements of Cash Flows over multiple periods, you can perform trend analysis on your cash inflows and outflows. This kind of analysis can help you spot potential issues early on, such as declining cash-generation ability or increasing reliance on financing.

Reliability of Your Funding Sources

The Statement of Cash Flows shows you the cash received from donations and grants. When you review your Statements of Cash Flows month over month and year over year, you can evaluate your funding sources, identify your most loyal and valuable donors, pinpoint funding vulnerabilities, and build a foundation of knowledge for any discussion of revenue diversification or risk mitigation.

Cash Management Efficiency at Your Nonprofit

By analyzing the timing of cash inflows and outflows shown in your Statement of Cash Flows, you can identify opportunities to optimize your cash management practices. Many of the cash shortages that nonprofits (and all businesses) experience are due to inefficiencies rather than scarcity.

For example, you can often turn around a declining cash flow trend with measures that don’t include bringing in more money. Things like improving the collection process for receivables, negotiating better payment terms with vendors, and investing current cash in vehicles that help your assets grow are all ways that you can turn a negative cash flow into a positive one.