FIN 380 Cash Management Scenario
The operating revenue of nonprofit organizations depends upon either donors or granting agencies. On the basis of the information provided by the scenario, it appears that monthly expenses of this nonprofit organization will exceed its monthly revenues. Even for nonprofit organizations, liquidity has immense importance. Therefore, cash budgets are prepared in order to compare monthly cash inflows and cash outflows. Through this an organization can predict the future cash shortfalls or surpluses so that corrective action is taken in advance.
As depicted by the scenario, the organization has mortgaged a building which it has rented out to some other entity. A mortgage loan is a long term loan secured on borrower’s property. Interest is payable on this loan which represents a major cash outflow for nonprofit organizations. As mortgage interest rates are expected to increase, therefore, the organization will be faced with liquidity problems in the near future. Since the objective of nonprofit organizations is to breakeven, hence they aim to earn revenue that is sufficient to cover their costs and do not aim to make a profit. As limited revenues are earned, therefore, a slight increase in interest payments may cause the monthly expenses to exceed the monthly revenues.