How to Measure Nonprofit Cash Flow
Unsurprisingly, there is more than one way to measure cash flow within your nonprofit organization. And how you choose to do it may rely on a number of things, including the size of your nonprofit, advice from your nonprofit bookkeeping services, and organizational structure.
No matter how you monitor your money (and maybe you’re not monitoring it at all, yet), most people agree that money talks–even in the nonprofit sector.
Free cash flow
One of the most popular options, free cash flow looks at the amount of money you have remaining after your basic expenses. Companies that do this have a good handle on their capital expenditures and their net cash from operations. By subtracting what it costs to operate from what is coming in, you determine your free cash flow.
This money should be used to build your nonprofit and enhance your value over time. It’s a pretty free flowing way of looking at cash flow, and your nonprofit tax service may recommend something slightly more regimented.
Discounted cash flow
This cash flow evaluator asks organizations to do some guesswork by estimating future cash flow versus capital. By discounting your cash flow estimates to come up with a present value projection, you adjust future cash flow. If an organization is trying to evaluate taking on another business or branch of business, this can be a useful metric.
But there are a lot of mistakes to be made, and this may not be a great choice for measuring cash flow without the guidance of a nonprofit bookkeeping service.
Cash flow from operations
Cash flow from operations is a great way to look at your organization’s overall financial health. By looking at the money made from your primary business activities, you get a good idea of the amount of money coming and going–a metric your nonprofit tax service will undoubtedly ask you to provide.
To look at your cash flow from operations, don’t take into consideration things like investments–you need to know your operational income, rather than your net income, which can be misleading.
Levered cash flow
Leveraged cash flow refers to the money left over after you pay your debts, which gives you a good idea about how much you can allocate for investment and distribution. To figure this out, look at your unlevered cash flow and subtract outstanding expenses (including interest payments from your debts).
Leveraged cash flow will demonstrate your credit health and debt management to give you a good idea about how you might manage your money.
Cash flow from investments
Cash flow from investments will look at your equipment, real estate, and stocks and bonds. An investment will be a cash out transaction, as it requires that money leave your account now in the anticipation of a greater financial reward later on.
When you sell your stocks, this is a cash in transaction. Both are present on the year-end inventory list you provide to your nonprofit bookkeeper.
Cash flow from financing activities
Cash flow from financing activities shows how your nonprofit raises capital and repays investors–new loans, dividends, additional stock to provide a picture of financial health–for example, loans to cover operational expenses may hint at deeper financial problems.
This cash flow measure will look at the percentage of cash that is the result of financing, as opposed to revenue. It’s a great way to identify whether or not you’re ready to grow.
The bottom line
The best way to determine the way or ways you might address cash flow in your organization is to meet with a nonprofit bookkeeping service. They’ll provide specific, targeted guidance that will help your organization excel!