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Cash Flow: What an embezzlement scandal taught me about forecasting

If you have survived an embezzlement scandal, raise your hand!

Fraud, financial mismanagement, and theft are far more common than most business owners and nonprofit board members may think. Even people who have lived through this experience often believe their situation was unique. Unfortunately, it happens all the time. Hence the implementation of the Sarbanes-Oxley Act (SOX) and Single Audits.

The one case I’m closest to happened while I was working as a development director in a nonprofit organization. When the executive director resigned from her position, I was handed the keys to the castle – or, more accurately, the password to the bank accounts. I immediately saw that we had no money. None. Less than none. Our bank account was overdrawn, the reserves were gone, and bill collectors started to call me the same day. A few weeks later, I was subpoenaed to testify because she had also failed to garnish her own wages.

I never thought I would feel sympathy for the person who brought an organization I loved to its knees, but having time and distance from this experience, I can only think about how stressful that must have been for her. I wonder how she slept at night – literally. Maybe she didn’t…or maybe it really didn’t affect her all that much. I'm sure I'll never know.

In any case, this was my problem to solve.

I took over this role less than three months after finishing my MBA. I had been going to school with the hopes of becoming an executive director one day. I had arrived at my dream job! …and so goes the lesson in being careful what you wish for.

The first order of business was convincing the Board of Directors that we could save the organization. My first board meeting went almost exactly like this:

Board members: “I move to approve Jennifer as the executive director. Second. All in favor. Aye. The motion passes. Second on the agenda – dissolving the organization.”

The organization and I both survived that meeting; but, the next morning, I had to go into my first staff meeting as the new executive director. ...I had to tell them that we may not be able to pay them, and if they had other job opportunities, they should take them.

So, what does all this have to do with cash flow? Well, starting with little, none, or negative none might be the easiest place to start – from a planning standpoint, at least. I have met plenty of business owners who laugh when I tell them we should write their cash flow forecast. “What cash flow? We don't have any money.”

Truly, though, when your back is against the wall, you have no choice but to figure it out. Are you going to survive or not? The only way to know is to gather and analyze your financial data. If that sounds complex, hang tight. You will see that it just means actually writing down the answers to questions you ask yourself and think about all of the time.

As I said, I had just finished my MBA. We learned how to create beautiful, sophisticated, complex cash flow forecasts through the accounting courses. But, I wasn't even thinking about those lessons when I actually had to apply the concept.

Here’s what I needed to figure out (in this order):

  • How much cash do we need to get to zero?

  • How much cash do we need to pay the staff?

  • How much cash do we need to pay the overhead?

  • Does anyone owe us money?

  • Are we expecting any of our pending proposals to be approved?

  • How much cash can we expect from service fees in the next week and month?

  • Do we have any opportunities for a windfall soon?

Though it’s hard to admit, given how terrifying and stressful this situation was, this was probably the best way I could learn to manage the organization. There certainly was no road map and my graduate program didn’t prepare me for nonprofit leadership following financial mismanagement (perhaps the Master of Public Administration covers these topics). But, this is my advice to anyone who lands an executive director role: learn every detail of the organization's finances to the point of memorization.

I don't know that I would have taken so much care in learning the financial scope had I not walked into a house of cards.

I do know that the critical need to do this in the beginning set me up for the success we had going forward. I knew exactly what every one of our bills and payroll should look like, so I knew instantly if there were any mistakes. Every single dollar in the beginning was hard-fought and desperately needed, so I certainly wasn't going to give away cash just because Comcast overcharged us. If a board member asked why a certain line item on the financial statements was higher or lower than normal – I knew. And, because of that, my board trusted my judgment, my capability, and my character.

This same principal and process applies to practically any small business leader. You may not have a Board of Directors - thus, you're only accountable to yourself, which makes it even more important.

So, as I asked those questions, I put it in a spreadsheet that looked something like this:

Sample Cash Flow Forecast

Is it sophisticated, beautiful, and complex? Nope. But, it gave me a way to keep track of the information I was gathering and quickly produced the information I needed. Obviously this is a simplified example, but the information is quite similar to my actual experience. I could see that I needed to collect outstanding grant payments, pull off an event, and ask for a few realistic monthly donations. I'm not saying it was easy - far from it - but it was achievable. And, it certainly meant that we had a shot at keeping the doors open.

I had to monitor my projections daily or even hourly at first (seriously, there were times that I would make a bank deposit two or three times a day as money came in). I didn't bother projecting out more than a month in the beginning because we were in survival mode.

“Cash flow forecast” sounds so high-level that it can intimidate small business owners and nonprofit administrators, but this is well within your capacity.

Mine (in real life) was detailed down to the penny, out of necessity. If there was a receipt or invoice, there was a line for it. In “normal” circumstances, it does not need to be this detailed. Under “ride or die” circumstances, though, I needed to see any possible way to cut spending and bring in money.

In my case, there were some easy things to slash-and-burn – a huge cell phone bill for lines that nobody used, for instance. Then, I called all of our funders to ask where our checks were (and THAT is a WHOLE other story for another day), and I was 100% honest with everyone else that was expecting payment from us. Surprisingly, not one vendor gave me a hard time about it. In fact, some were even willing to forgive some of the past-due payments in exchange for my word that I wouldn’t let it happen again. And, I didn’t.

Having that detailed, working knowledge of the organization’s finances told me that yes, we were going to survive once we addressed every single source of revenue and expense. Fortunately, I was able to be transparent with my staff and board, and they all rallied to see it through. Double fortunately, nobody quit. Extra fortunately, we were able to pull it together before payday, and no one went without a paycheck.

Within a year of this experience, we were offering raises to staff, halfway to completing a capital campaign to buy a building, and we even had operating reserves! Obviously, a lot of hard work along the way went into that, but those early cash flow statements gave me the information I needed to identify opportunities for revenue growth and to minimize unnecessary expenses. ...and to keep myself and everyone else from freaking out (for the most part).

If all of this still sounds too difficult or overwhelming, contact me. If it's just the math or spreadsheet formulas that intimidate you, I promise it will be easy to learn. The math is only adding and subtracting, and there is only one formula needed. Together, we will create your cash flow forecast, and I will teach you how to find and interpret the numbers you need. Before you know it, you’ll be doing it on your own – you may even find yourself playing with this tool as a substitute for Facebook when you’re trying to find your motivation!

There are several other lessons from this experience, including “where did all of the money go?” that may help people who are running a company or nonprofit. I will write another post soon about how to identify red flags and include tips to minimize your exposure to theft. My business partner, Dorothy Wilson, has been in public accounting for over 30 years and has accumulated a trove of embezzlement war stories (including one about a woman who was stealing from the accounting department of an oil and gas company).

Check back soon for that post. It will be a juicy one!

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