With current market and economic conditions declining across the United States, many businesses and organizations are keeping a more watchful eye on their liquid assets. For not-for-profits especially, now is the time to renew the focus on liquidity management—taking some practical steps to protect assets and ensure the continued operation of your organization long-term.
What Is Liquidity Management and Why Does It Matter?
Specifically, liquidity management refers to how a business or organization monitors and manages its cash flow and liquid assets. With liquidity management practices in place, organizations can ensure that their own cash flow and liquid assets can support not just day-to-day operations, but long-term organizational goals and objectives as well.
In a not-for-profit organization especially, liquidity management is critical because it can ensure that organizations have access to the funds needed to operate smoothly and efficiently. Likewise, because funding for not-for-profits can ebb and flow throughout the year, proper liquidity management practices can help organizations continue to operate and even thrive during times of less funding.
Unfortunately, when not-for-profits fail to oversee their liquid assets carefully, they could end up missing out on valuable opportunities or even putting their operations at risk by being unable to pay vendors or make timely repayments on debt.
The Basics of Cash Management Plans for Not-for-Profits
For not-for-profits that do not already have a cash management plan in place, this is the first critical step to better managing liquidity. With a formal cash management plan established, it is possible for not-for-profits to avoid unnecessary borrowing and even widely invest profits.
In establishing a cash management plan, organizations should focus on creating daily, weekly, and monthly reports that allow for greater insights into changes in cash balances, flow of cash, and collections/payments. This can provide valuable information on how cash moves through the organization.
Best Practices for Liquidity Management in Not-for-Profits
With a cash management plan established, not-for-profits should move on to assessing their current liquidity management practices and implementing some changes as needed.
So, what are some industry-accepted best practices for liquidity management in not-for-profits? Some to consider include:
- Offering convenient electronic payment options to customers (instead of cash or check payments only) to encourage timely payments and improved cash flow for the organization.
- Making bank deposits earlier in the day, which may ensure that accounts are credited on the same day instead of on the following business day.
- Holding on to vendor payments for as long as possible to maximize cash availability within the organization.
- Having a system in place to follow up on overdue accounts as promptly as possible.
In addition to these tips and best practices, not-for-profit organizations are encouraged to find ways to diversify their revenue streams and build healthy reserves to be drawn upon in emergency situations only. All of this, in addition to carefully tracking cash flow and using forecasting software to make projections, can help organizations better manage their own liquid assets—even during times of economic downturn.
What About Financial Statement Disclosures?
Finally, not-for-profit leaders should remember that they are required to include a liquidity disclosure in all of their financial statements. This includes a disclosure of all current assets that can be converted into cash. Disclosing these assets with each financial statement is critical not just for compliance purposes, but also to allow for a better understanding into the financial stability and health of the organization as a whole.
More specifically, financial statement disclosures for not-for-profits should be made through IRS Form 990. Even with these disclosures in place, not-for-profits should continue to keep detailed records and documentation, as this may be requested by the IRS for further investigation.
What Else You Need to Know
Handling liquidity management as a not-for-profit can be challenging, especially during periods where the economy is in a downturn and funding may be harder to come by. At the same time, this uncertainty is what makes savvy liquidity management even more important to the long-term success of your organization.
If you have any questions or would like more information, please contact our Not-for-Profit Practice Group.