Newcap, The American Musical Theater of San Jose, and Brockton Family and Community Services.

These three nonprofit organizations (NPOs) have each filed for bankruptcy, a process that involved no scandal whatsoever. Why did this happen?

Was it mismanagement? Poor board oversight? Delayed grantor reimbursements from grant contracts? Severe breakage of donor pledges?

I’ve only served one NPO where we were constantly on the brink of shutting down. Thankfully, that never happened, and we ultimately found a solution to the gap between our income sources and the critical costs of supporting our mission. This was also a case where I could see the NPO’s liquidity analysis in my sleep.

However, for most NPOs with general expenditures exceeding $1 million annually, I’m a big believer in conducting a monthly liquidity analysis, especially if a weekly treasury management process is not followed rigidly. The analysis I will explain is not difficult to complete, and it’s probably the first financial report a board should review at its quarterly meetings.

Liquidity analysis alone will not prevent bankruptcy, but the work performed will reveal headwinds on the horizon, allowing management to act proactively rather than reactively to address cash shortfalls.