Being financially stable is critical to any business, including not-for-profit entities and especially in times of economic downturn. Many not-for-profit organizations are closely monitoring the liquidity of their assets due to current market or economic conditions and the recent disruptions in the United States (U.S.) banking system. Organizations who understand how liquidity plays an integral part in their day-to-day operations are better positioned in times of global or domestic downturns.

What is liquidity?

Liquidity is generally defined as the cash and/or current assets, such as money market accounts, certificates of deposits, or other short-term investments, that are available and can readily be converted to cash. A not-for-profit is generally believed to be liquid if it has readily accessible cash to meet its needs. For many not-for-profit organizations, the lack of sufficient oversight of liquid assets can lead to lost opportunities, cash flow challenges, and undue risk. Some of the risks include the inability to pay vendors, make debt repayments, or fund payroll and programmatic services.

Establishing a formal cash management plan

The first step into gaining visibility into an organization’s liquidity position is to create a cash management plan. The establishment of a formal cash management plan can help not-for-profit organizations avoid unnecessary borrowing and possibly enable investment of excess cash.

The following are some best practices an organization can implement:

• A daily report that summarizes changes in cash balances, outstanding accounts receivable and payables, and investment balances.
• A weekly or monthly cash flow forecast of cash requirements and receipts projected over the same time timeframe.
• A monthly status report of unusual billing, collection, or payment backlogs influencing cash flow.

Implementing liquidity management practices

Organizations should develop liquidity management practices that maximize working capital through refinement of internal sources.

As such, organizations should consider:

• Accelerating cash deposits by making bank deposits early enough to be credited the same day. Evaluate the opportunities for virtual or remote depositing features that may be available with your financial institution.
• Offering customers and constituents electronic payment options such as wires, ACH, Zelle, or Venmo to further accelerate the flow of payments into the organization’s bank account.
• Preparing and regularly monitoring an operating cash budget.
• Maximizing the availability of cash by holding vendor payments the entire time allowable, without sacrificing significant vendor discounts.
• Improving collection rates by following up promptly on past-due accounts, referring overdue accounts for collection, and offering a one-time-only cash discount on older receivables.
• Instituting credit limits, when appropriate, to minimize exposure to any one customer. As an alternative, require payment in advance for new or troublesome customer/constituents.
• Reducing or monitoring the amounts of cash being maintained in noninterest-bearing operating accounts. Organizations might consider holding minimum balances required for day-to-day operations in operating accounts and using excess cash to reduce borrowings or be invested on a short-term basis. Effective liquidity management can increase the profits earned on the organization's resources.

Financial statement disclosure

Not-for-profits are required to include a liquidity disclosure within their financial statements. As a result, certain qualitative and quantitative information is readily disclosed about how the organization manages its liquid resources. This information is intended to facilitate the understanding of the financial health and sustainability of the organization.

Organizations must disclose all current assets that are cash or readily convertible to cash, unless there are external or internal limitations on those assets. Not-for-profits should deduct illiquid investments that cannot be drawn upon within a year, which often include such items as board designated reserves, donor restricted net assets, and pledged collateral. In addition, not-for-profits should also disclose qualitative information in their liquidity footnote, such as the availability of lines of credit.

How we can help

Liquidity management requires attention and persistent awareness of financial data. Organizations may have a strong cash position, but economic cycles have peaks and valleys which can result in a lack of access to liquidity. By implementing, evaluating, and continually refining cash planning and management practices organizations will be better prepared to maintain, access, and utilize liquidity in any economic circumstance.

Citrin Cooperman’s Not-for-Profit Industry Practice’s professionals can assist you in assessing your organization’s liquidity position and potential enhancements. Please contact John Eusanio at jeusanio@citrincooperman.com, George Koutris at gkoutris@citrincooperman.com, or a member of the Not-for Profit Industry Practice’s team.