Cashflow basics

A practical guide to understanding cashflow

What is a cashflow?

Understanding cash flow is crucial for any organization, especially charities with variable income and strict financial responsibilities. This guide will help you understand what cash flow is, why it matters, and how to create a simple cash flow projection.

Cash flow is a fundamental financial concept that tracks the movement of money in and out of your organisation. At its core, cash flow is about ensuring you have enough cash in the bank to pay your bills and meet your financial obligations.

For charities, maintaining a healthy cash flow is critical. Potential risks of poor cash flow management include:

• Inability to pay staff on time

• Failure to honour contracts

• Risk of becoming temporarily insolvent

• Missed opportunities for financial optimisation

When to create a cashflow forecast

You should consider creating a cash flow projection in the following situations:

• Limited Financial Resources

  • When you need to carefully monitor your cash reserves

  • To prevent running out of money

• Variable Income and Expenditure

  • If your income is irregular (e.g., quarterly grant payments)

  • When your organization experiences seasonal variations in activity

• Maximizing Financial Efficiency

  • To optimize interest earnings by managing bank accounts strategically

  • To plan fund transfers between different types of accounts

How to create a cashflow forecast

Step-by-step guide

Keep your plan concise—shorter documents are more likely to be read and used. If a longer document is unavoidable, include an executive summary highlighting key points.

• Start with Your Annual Budget

  • Distribute your annual budget across 12 months

  • Predict when specific transactions will occur

  • Note that some expenses will be consistent (e.g., cleaning supplies), while others will vary (e.g., grant payments)

• Calculate Your Starting Balance

  • Estimate your bank balance at the beginning of the year

  • This will be your initial reference point

• Monthly Calculations

  • Add income for the month

  • Subtract expected payments

  • Calculate the closing balance

  • Use this closing balance as the opening balance for the next month

• Tracking and Updating

  • Replace estimated figures with actual numbers as the year progresses

  • Continuously refine your projections for increased accuracy

Pro tips

• Ignore non-cash budget items like depreciation

• Be prepared to take proactive measures if cash flow looks tight

• Delay non-essential spending

• Explore early income generation

Example cashflow forecast

Here's a simplified example of a cash flow projection: