July 2007 NEWSLETTER: Financial Literacy for Not-for-Profits
"Financial Literacy for Not-for-Profits"
This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus is on helping organizations that do good, do better ... by helping Not-for-Profit Boards and managers improve their understanding of financial management and reporting concepts, and implementing practical, effective financial controls and processes.
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July 2007: Financial Literacy for Not-for-Profits
This month's Financial Literacy Newsletter addresses the importance of cash.
Cash is King
"Cash is King". At least, so the old saying goes. And, it was, is and will continue to be true! Why so?
Well, anyone who has ever juggled an income (like a salary) and expenses (like food, clothes, rent or mortgages payments, and so on) understands this basic principle: they don't ask you at the grocery store what your income is - they ask if you've got the cash to pay, now.
This principle applies equally to people, to corporations large and small, and to not-for-profits. (In fact, the only one it doesn't necessarily apply to is the government, which can print its own money!). It applies to Conrad Black, and it applies to the homeless men, women and children in our communities.
Cash is King, simply because it is the "medium for exchange". It is the lubricant for every economic engine. It is the language of buying and selling everything. Without cash, our system of commerce would grind very rapidly to a complete halt.
Notice that we are not talking here about profits. This is not an issue of "making money"; this is an issue of "having money". Profits are for accountants (more on this later) - cash is for people and organizations with bills to pay.
After all, you can't spend your profits; you can't spend your accounts receivable or inventory; you can't even spend your surplus or retained earnings. The only thing you can spend is cash. And so, the only value that all these other things have, ultimately, is the amount of cash that they can be turned into. Cash, you see, is King.
OK, perhaps we are belabouring this point. But, it is the single-most important factor in knowing whether we as not-for-profits will be able to carry on our good works another day. We can continue if - and only if - we have the cash.
I recall working on a charity's budget a few years ago. They had cash in the bank. And, they had a realistic, breakeven budget for the coming year. But when we looked at the timing of its revenues being received (its cash inflows), compared to the timing of its expenses being paid (its cash outflows), we saw a potential problem arising during the year: the cash was coming close to running out! They were starting out with cash, breaking even for the year, but were running the risk of going out of business in the meantime. Cash is King.
Accountants and Cash
Even accountants know that Cash is King. So, why do they spend so much time measuring things other than cash - like profit?
Why do accountants even worry about profit? Why do they make all of those accruals and adjustments every year to come up with a figure that isn't cash? Because profit is supposedly a better predictor of cash over time. Profit, or earnings, or excess of revenues over expenditures - whatever you want to call it - is supposed to be a "normalized", "undistorted" measure of the organization's operations. It is supposed to measure an organization's ability to generate (or consume) cash. It is supposed to be a better indicator of future cash flows. We measure profit because … yup, Cash is King.
Now, sometimes accountants can get wrapped up in their profit determinations, in their generally accepted accounting principles, in the accounting for it all. But, when you pin down your accountant about what to focus on, most will admit, directly or indirectly, that Cash is King.
Focusing on the Cash
Understanding that Cash is King is the first important step in managing and planning for your organization's finances.
When it comes to managing your operations, you probably know this lesson all too well. Monitoring the bank balance is a key regular activity. And, juggling it against expenditures that need to be made on the one hand, and deposits of donations and other income on the other hand, is a continuing challenge for most organizations. And, if this isn't a challenge, juggling it against long- and short-term investments is the other challenge you are likely facing. Either way, having just the right amount of cash on hand is the goal.
For planning, the budget is your number one operational planning tool, and here the focus again needs to be on the cash. Budgeting for cash is a tricky business, though. Not only do you need to estimate and predict the amounts of revenue and expense items well, you also need to predict the timing of those items well (as illustrated earlier).
In fact, timing issues will likely have a greater impact on your cash requirements than the budget amounts. Accordingly, a good proportion of your time and attention in preparing and reviewing the budget should be spent on timing issues, and projecting (and planning for) your maximum cash requirements for the coming year.
Remember, Cash IS King, and as every chess player knows, you must protect the King.
William Harper is a Chartered Accountant, a long-lapsed chess player, and has broad experience in financial management, financial reporting and … cash! Contact us for help.