No Such Thing as Non Profit!
Are
you involved in a non-profit organization? Do not confuse non-profit with failing to generate cash!
The use of the term non –profit regrettably has many executives in the industry
deluded that they actually turn a profit. Nothing could be further from the
truth. The downturn in the economy makes understanding this distinction more
important than ever.
One
becomes a non –profit by qualifying under Section 501 c3 of the Internal
Revenue Code. Such qualification means that the organization files a different
tax return than organizations paying income tax. The tax code is not our topic today. It will be vital that
non-profit executives understand the origins of their cash flow to navigate the
downturn in the economy.
Accountants
prepare three statements, a balance sheet, an income statement, and a cash flow
statement. The cash flow statement is the most important in terms of the
survival, of your non-profit. Let’s examine the three sections of the cash flow
statement.
Cash
is generated from three sources. The first is Operations. Fund raising should
generate more cash inflow than outflow. In that case Operations show a positive
result. It is vital to understand that for some periods the organization may
not generate sufficient cash flow to fund Operations. In that case, there are
two other sources of cash.
The
second source (and use!) is investments. Cash not used in current operations
may be invested in certificates of deposit or treasury bills, known as cash
equivalents. These may be liquidated when needed. Other Investments include
capital items like the truck to deliver meals on wheels or the kennel to house
rescued animals. Clearly it is not in the interest of the non-profit to sell
these assets for cash! Yet many companies are now selling valuable property to
stay in business. Ford’s sale of
British Aston Martin is an example. GM’s failure to Swedish Saab is a negative example.
If
neither of those avenues are producing cash, the third alternative is
Financing. Financing consists of borrowing from stakeholders, church bonds are
a good example. Or bank loans may be employed. It is imperative to understand
that this source of cash must be repaid. The inability of GM and Chrysler to
meet their requirements finally exhausted the ability to raise cahs in this third category. Had the
government not come to the rescue, they would be out of business today.
It
is imperative to understand that the budget must plan for re-payment of
borrowed funds (Financing). In addition it must provide for acquisition of
assets (Investments) needed to fulfill the mission of the non-profit. Successful companies like Google
produce the cash they need from Operations and stock sales. Cash generators like
National Geographic have multiple operations from magazine sales to television
to fund projects.
Yesterday
the Salvation Army, one of the best managed non-profits, announced that Kettle
Collections are down 20% from last year. Former donors are now in need of the
Army’s services. This will clearly impact on its cash flow from operations. It
may require additional financing. But the point is to make the right decision
now. Our point is Cash Flow has
the attention of the Salvation Army; it deserves your attention too.
Successful
administrators are familiar with their cash flow statements. Like Santa, they
will be checking them twice in these tough times. Make sure you avoid GM type
problems by knowing your cash flow
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