Cash flow essentials. A guide for leaders of charities and NFPs

Last month, our Co-CEO Carol discussed three key accounting terms that influence everyday financial management. Restricted funds, unrestricted funds and fund accounting. This month, I follow this up with an often misunderstood accounting function: cash flow.

At AFG, we work exclusively with charities and not for profit organisations. The one constant is that the mission always comes first. Effective cash flow management is a key component of achieving that mission. While many leaders focus on budgets, funding, and program delivery, understanding cash flow is essential to ensuring your organisation is sustainable and effective.

In simple terms, cash flow is the movement of money into and out of your organisation. It tracks when cash is actually received and when it is spent, regardless of when income is earned or expenses are incurred. This distinction is important. Many NFPs use accrual accounting, in which income and expenses are recorded when they are earned or incurred, not when cash physically changes hands. As a result, your financial statements may show a surplus, while your bank account tells a different story.

Cash flow answers a practical question: Do we have enough cash to meet our obligations when they fall due?

Cash flow is formally captured in the Statement of Cash Flows, one of the core financial reports alongside the income statement and balance sheet. This report is typically divided into three categories:

• Operating activities. These relate to your day-to-day activities. Receipts from donations, grants, and service delivery, as well as payments for wages, suppliers, and program costs.
• Investing activities. This includes the purchase or sale of long-term assets, such as equipment, vehicles, or property.
• Financing activities. These involve funding arrangements, such as loans received or repaid.

For NFP leaders, the operating section is usually the most critical, as it reflects whether your core activities are generating enough cash to sustain operations.

While medium to large charities and NFPs need to operate as commercial organisations, unlike for profit businesses, they often face irregular and restricted income streams. Grants may be paid in instalments, donations can fluctuate, and funding may be tied to specific programs and activities. This makes cash flow management even more important.

Here are some key reasons why:

• Ensuring operational continuity. Even if your organisation is financially healthy on paper, a lack of available cash can disrupt operations. Staff salaries, rent, and supplier payments all require timely cash outflows. Poor cash flow can lead to delays, strained relationships, or even service interruptions.
• Ensuring compliance obligations are met. Timely payments to the ATO for GST and PAYG withheld on wages and superannuation are critical and may place organisations in financial and legal breach if not monitored.
• Managing funding timing gaps. Many NFPs experience gaps between when expenses are incurred and when funding is received. For example, you may deliver a program now but not receive grant funding until later. Without careful cash flow planning, these timing differences can create significant pressure.
• Supporting better decision-making. A clear understanding of cash flow allows leaders to make informed decisions about hiring, program expansion, and capital investments. It helps answer questions like:
  Can we afford to take on a new project?
  Do we need to delay spending?
  Should we build a cash reserve?
• Maintaining financial stability. Consistent positive cash flow builds resilience. It enables your organisation to address unexpected events, such as funding cuts or increased service demand, without reliance on an external funder.

A common misconception is equating surplus with cash availability. A surplus means your income exceeds your expenses over a period, but this is based on accounting rules, not actual cash movement. For example:

• You may record grant income before receiving the cash.
• You may incur expenses that haven’t yet been paid.

As a result, an organisation can report a surplus while still facing a cash shortage. This is why reviewing the income statement and the cash flow statement is essential.

Cash flow management requires regular monitoring and planning. Here are some practical steps you can take to help manage and better understand your cash flow.

• Prepare a cash flow forecast. A cash flow forecast projects your expected inflows and outflows over the coming months. It helps identify potential shortfalls in advance, allowing time to take corrective action.
• Monitor regularly. Cash flow should be reviewed at least monthly, if not more frequently. Compare actual results to your forecast and adjust as needed.
• Build a cash reserve. Where possible, aim to maintain a reserve that covers several months of operating expenses. This provides a buffer against unexpected expenses or events.
• Understand funding conditions. Be clear on when funding will be received and any restrictions attached to it. This ensures you can plan appropriately and avoid using funds prematurely.
• Communicate with stakeholders. If cash flow challenges arise, early communication with funders, suppliers, the ATO and staff can help manage expectations and maintain trust. Oftentimes, extensions and payment plans can be negotiated with funders, suppliers and the ATO if you get in front of late payments.

Cash flow is more than just a financial concept. For NFP leaders, developing a strong understanding of cash flow enables better planning, reduces risk, and supports long-term impact. The financial experts at AFG are ideally placed to support your organisation’s financial management and to provide qualified, experienced guidance. We work exclusively with charities and NFPs across Australia, and our outsourcing model creates real value for expert accounting oversight without the burden of internal salaries and associated costs.