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Cash and cash flow

6.3 Cash and cash flow

A crucial issue in the delivery of any project is the management of cash flow. A project budget may show that expenditure will be balanced by income but in considering project cash flow it is necessary to examine not only questions of ‘how much?’ but also questions of ‘when?’.  

We cannot over emphasise the importance of cashflow. As in Business the best ideas and the best projects can grind to a halt if the cashflow isn't managed correctly. A project without access to immediate funds can't move forward and this lack of progress will impact on everything creating an unsustainable project that cannot fulfill its intitial aims and objectives.

This section summarises the most common ways to avoid negative cash flow. The approaches are not mutually exclusive; a combination of several approaches is likely to represent the best way forward.

Fundraise first

This is the most straightforward approach and is analogous to domestic financial management where we ‘save up’ for a purchase and only buy when the money is fully secured. The advantage of this approach is that it is relatively risk free and while funds are accumulating, the positive cash balance can earn additional investment interest. If fundraising is by means of an appeal, then the project must be relatively clearly defined, have broad support and have funders who are prepared to wait some time for the results to be delivered. Many projects do not meet these criteria and many potential funders may be unwilling to donate ‘up front’ in this way.

Modular delivery and advanced fundraising

This is a variation on the above, where a large project is broken down into smaller less costly elements, each relatively free-standing, i.e. its success is not contingent upon the delivery of subsequent modules. This approach has the effect of progressing work at the same rate as funding is coming in, but with a shorter lag relative to doing it all as a single project. The disadvantage is that overall the project is likely to be more expensive, as there will be fewer economies of scale and relatively more start-up and wind-down costs.

Secure loans

Where funders will only pay in arrears, the project will be cash flow negative. One approach is to borrow money to manage this. For non-commercial projects, borrowing can be complicated, especially where the body undertaking the project is an NGO. This is because NGOs usually have very limited assets against which a loan can be secured.

The problem is compounded by the fact that there is little tradition among most funding bodies of meeting borrowing costs, indeed many specifically preclude these. 

Secure guarantor

A variation on the above is for the project delivery organisation to use the services of a guarantor. This can make it much easier to then secure loans at a reasonable rate because the lender’s risk is greatly reduced. As with commercial loans, however, it is not easy for NGOs to secure commercial guarantees, again because of a lack of assets. A suitable guarantor is therefore most likely to be a non-commercial organisation such as a local authority.

Delayed payments to suppliers or contractors

It may be possible to avoid negative cash flow by negotiating favourable payment terms with suppliers. The burden of carrying a negative cash flow is thereby offloaded onto the supplier. However, this is likely to increase the price charged by a supplier as they will need to factor into their price the cost to their business of running a negative cash flow. Also, if extended credit terms with suppliers are the sole means of keeping cash flow positive, the timing of payments from funders becomes absolutely critical and must be precisely agreed in advance. It must be emphasised that prolonging payments to suppliers should only be by prior agreement as late payments risk jeopardising the relationship with the supplier.

Share negative cash flow burden with partner organisations

Where a project is in collaboration with other partner organisations, it may be possible to share some of the burdens and associated risks of negative cash flow. Some partner organisations, depending on their nature, status and structure, may be more able to carry negative cash flows than others.

Balance 'up front' and 'in arrears' funding sources

Projects can have several funding sources, with different funders having different approaches to payment schedules. Some may pay in advance while others pay in arrears. Depending upon the accounting and reporting requirements of the funders it may be possible to keep the project overall in a positive cash flow position by appropriately scheduling the work.

The key is to use the up-front payments to deliver work that enables the ‘in arrears’ funder to release payment. However, this balancing act requires great care, to ensure that money is spent in a way that is satisfactory to all the funders at all times.

Negotiated arrangement with funding bodies

While some funding bodies have very firm and non-negotiable rules concerning when and how payments are made, others are much more flexible. Ideally a project would seek all payments to be made in advance. Where this is not possible other arrangements might include frequent stage payments or a start-up loan to be deducted from the final claim.

Valuing non cash project contributions

Support may be provided to a project by means other than cash, e.g. goods or time. Placing a cash value on these contributions may enable grants to be claimed. The funder is contributing (in arrears) for work that has already been done but without the commensurate need for cash to flow outwards.

Internal borrowing

Provided a delivery organisation has adequate reserves, it may be possible to cash flow a project by drawing upon these. This will impose a cost on the organisation, in terms of foregone interest earned, which it is important to try and quantify in order to enable these costs to be recovered or, where this is not possible, to identify the financial contribution the delivery organisation is making to the project.

Go to the next section - Financial management

Useful links

Cash flow advice and examples