Four Ways to Deal with a Low Cash Balance

Operating with a low supply of cash reserves can be an extremely stressful situation for any business. This can be a particularly daunting challenge for public charter and independent schools as cash inflows do not always align well with required cash outflows.

Common reasons for low cash balances in schools include enrollment shortfalls, over-hiring (relative to enrollment levels), and high occupancy expenses. A less common reason is overspending by a small amount in many different categories, with no single expense category breaking the bank. 

In order to effectively address a low cash balance, there are four key steps that we recommend. The first two steps help to avoid the situation entirely, while the last two steps offer guidance on managing once you find yourself in such a situation.

1. Budget Conservatively
   If your school has frequently over-spent to budget in a particular category, add a contingency for unforeseen expenses to provide a buffer against the possibility of further overspending (e.g., 1-2% of total expenses). That way, even if you spend your contingency in addition to your budget, you should still be able to end the year on target. On the revenue side, including an enrollment contingency is always prudent given the impact of enrollment shortfalls on the cash balance.

2. Forecast Accurately
   Maintaining monthly forecasts for the entire fiscal year is the best way to ensure accurate forecasting. Analyze each expense and cash flow category to reasonably map out the timing of planned spending, ideally at the vendor level of detail for larger expense categories. Whenever there is unexpected spending, adjust the forecast accordingly to accurately predict and manage your cash balance.
   

3. Communicate
   Communication is the most important aspect of managing a tenuous situation like low cash. We encourage schools to clearly and honestly communicate the financial situation to stakeholders such as staff, parent associations, and board members. In-person meetings are usually most effective in helping stakeholders understand the impact of a low cash balance. When discussing the low cash balance, use clear language to outline how you are planning to manage the situation. By doing so, you will inform stakeholders of why they may see temporary changes, demonstrate your full awareness and appreciation of the situation, and perhaps even encourage them to think of how they can help the school become more financially sustainable.

4. Determine Essential Spending
   If worst comes to worst and you can only afford to pay certain bills, it is critical to understand which expenses you can delay. In extreme circumstances, end of year bonuses may be delayed or decreased. While not ideal, accounts payable management around which bills are prioritized to be paid may be necessary. Spending that is typically seen as essential include payroll, business insurance, health insurance, and utilities. Other spending should be addressed on a case by case basis.

Not having a lot of cash on hand can be an intimidating situation for any school, but it is important to put a process in place as soon as possible. Following the above steps can help schools navigate this situation while continuing to deliver quality education to their students.

[This post contributed by John Kenchelian, Finance Specialist.]