Tip of the Week: Know how many months of cash you have on hand
As David Greco so concisely points out in “Nonprofit Financial Management,” or Chapter 13 of Nonprofit Management 101, “To make good decisions, nonprofit managers need good information. This is especially true when it comes to financial information.”
One of the most important measurements for an organization to understand is “cash on hand,” or how many months you could survive if no additional funds were received. This is one of the most common measurements of liquidity for organizations, and is helpful to know when engaging in any decision that has financial implications, as it helps you understand your cash reserves in simple terms.
The formula is simple: Take your total “Cash and Equivalents” (sometimes called “Cash and Near-Cash”) and divide that by your average monthly expenses (as calculated by dividing your annual operating expenses by 12 months).
For example, if your total cash and equivalents is $10,000, and your annual expenses are $30,000, meaning your average monthly expenses are $2,500 (i.e., $30,000/12 = $2,500), you have enough cash on hand to last four months ($10,000/$2,500 = 4) should you receive no additional funds.
Read more and discover related resources in Chapter 13 of Nonprofit Management 101.