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Organizational sustainability

 

Solutions to a short-term cash deficit

 

Description of the problem(s)

  1. The short-term Cash-Flow forecast shows a cash deficit in one or more time periods
  2. The actual cash flow in a time period is negative

 

Possible causes

A short-term cash deficit could be due to:

  • Wrong assumptions about payment dates while making cash flow projections.
  • Wrong assumptions about expenses during a project start-up phase.
  • An agreed payment is being delayed.
  • Something has to be bought that was not included in the budget (e.g. some equipment breaks down and has to be replaced)

 

Actions that could help

You have a number of options to eliminate a future short-term cash problem

  • Arranging an overdraft facility.
  • Taking a temporary loan from a bank.
  • Use some of the reserves you have built up from previous cash surpluses.
  • Delaying some activities and/or investments.
  • Renegotiating payment schedules you have agreed upon.
  • Delaying payment to suppliers
  • Requesting that a grant is paid out earlier

You have to be aware that some of these actions may affect your relationship to beneficiaries, customers and donors negatively.

An unexpected cash deficit in the current month that requires immediate action could be covered by an existing overdraft facility or using cash surpluses from previous months.

 

Solutions to frequent or long lasting negative cash flows

 

Description of the problem(s)

  1. The annual cash-Flow forecast shows cash deficits over a longer period of time 
  2. The actual cash flow frequently negative

 

Possible causes

The negative cash flow could be due to:

  • Optimistic assumptions during budget planning and/or while making cash flow projections.
  • Unreliable donors, grant makers and customers.
  • Low efficiency of processes
  • Project or community specific problems
  • Development and/or start-up phase of new products.
  • Economic downturn or recession.

 

Actions that could help

Solutions described above that would be helpful to eliminate a short term cash deficit will not solve cash shortages that occur almost every year or last for long period of time.

In this case your actions have to be directed at

  • Improving the working environment (e.g. better equipment, good communication, motivating leadership).
  • Providing training.
  • Improving your relationship with key stakeholders.
  • Decreasing your dependence of or eliminate unreliable donor and customers by diversifying your sources of income.
  • Improving the quality of your planning processes by strengthening financial management.
  • Increasing the ability to respond quickly and effectively to difficult times.