As the accounting manager of an association management company, one challenge that I have encountered is that most volunteer association board members do not have a diverse accounting knowledge or background. Most people have an idea of how to manage their personal finances, but this is likely being done on more of a cash in, cash out basis, otherwise known as cash flow.

Our association management team regularly has discussions regarding what information is valuable to a volunteer board member. It’s important to note the difference between profit and cash when forecasting for the future of your association. Many board members are interested in cash flow, however it’s an income statement (showing profit, revenue, expenses) that is usually the standard financial statement provided by accountants. It has become apparent to me that these financial statements often don’t provide the information that most board members would like to see—i.e. cash flow.

We’ve all heard “cash is king” and if that’s so, then cash flow is the heart of an association’s financial reporting. Without cash, profits are meaningless. If there is positive cash flow, this means that the cash coming into the association is higher than the cash flowing out. A negative cash flow occurs when more cash is going out than coming into the association.

Just because an association’s statement of operations/income statement shows an excess of revenue over expenses, does not necessarily mean that the association has positive cash flow. Achieving positive cash flow does not come by chance; it is something that takes planning and hard work.

 

There is a secret that very few business owners have discovered (and the accounting community has not done
a good job revealing): knowing whether you earned a profit (or created a loss) is not the same as knowing
what happened to your cash.

                   -Phillip Campbell, Never Run Out of Cash

 

Profit does not equal positive cash flow. This means that you cannot look at an income statement and understand the cash situation in an association.

Growth of an association requires cash. Perhaps, for example, an investment should be made in higher priced marketing tactics or better management to attract more members. This requires cash up front. Some leaders see growth as a solution to negative cash flow and end up with an even worse cash flow problem after spending the cash. A better scenario is to plan for cash outlays related to the growth you are trying to achieve in advance. That way surprises are minimized.

How to Improve Cash Flow:

  • Focus on collecting accounts receivable; for more about accounts receivable please see my article How to Effectively Manage Accounts Receivable.
  • Offer pricing discounts. Giving members a discount won’t increase your revenue for the long term, but if the association is experiencing a cash flow problem, this may be a way out of the problem for the short term.
  • Take on short term loans. Getting a short-term loan from a bank would also help with cash flow problems, if you use the cash wisely as a way out of a short-term problem and can plan appropriately for future positive cash flow.
  • Rather than trying to acquire new members, think of new ways to sell more to existing members. Acquiring new members may involve an initial cash outlay, whereas selling more to existing members may not require as much up front.
  • Check the payment terms on bills that need to be paid to avoid spending cash in advance, when it is not necessary.

In his book Never Run Out of Cash, Phillip Campbell suggests asking these two questions when trying to improve your association’s cash flow situation:

  1. What is the cash balance right now?
  2. What do I expect the cash balance to be six months from now?

One way to begin managing your cash flow is to track monthly cash inflows and outflows, and start projecting based on the previous month’s, and eventually the previous year’s (if your association generally works on an annual basis). If you can’t answer the above questions, your association’s external accountant may be able to help you to get the answers. This will be the key to making smart business decisions for your association.