We all know that money is the fuel that keeps the nonprofit engine running. We think about the need for money frequently. We worry about it when it is low. How does money relate to financial value?
The only way to create financial value is to increase the reserves of the organization. This means that the assets must grow faster each year than the liabilities.
One simple way to accomplish this is to pay down the debt. One must avoid selling assets to pay debt. Paying down debt makes us feel good. Selling assets fails change the balance between assets and liabilities. This process is unable to increase the reserves.
The best way to create reserves is to increase cash flow. When the year ends and the organization has taken in more cash than it has sent out, the reserves increase and financial value is created.
Most year-end auditor's reports provide a cash analysis. You may want to look at the analysis for the past three years and plot the bottom line of the auditor's work on a simple graph. If the trend is heading upward your organization is creating financial value and with it increased sustainability. If the trend is flat or declining, financial value is being lost and sustainability is being eroded. The reason a flat line is detrimental instead of neutral is that inflation is eating away at financial value each year.
What can we do or should we do with the financial value that we are creating? The financial value or growing reserves can be used to invest in new equipment that will increase productivity or an improved website to enhance donor relations.
Notice how the reserves are being used to create more value. Increased productivity means more work can be accomplished without an increase in labor costs. Better donor relations make increasing donations easier again without increased costs. Yes, there is a one-time expense. However, the ongoing expenses remain unchanged or decrease. In short, there is a positive return on investment. In addition, the assets are unchanged (cash was converted into new equipment).
Many for-profits create monthly cash flow reports. The report projects the change in cash on a month-by-month basis. The leadership is able to determine the trend and take action to increase favorable trends and eliminate unfavorable trends.
