What's the Plan? Best Practices in Not-for-Profit Budgeting and Financial Planning

December 3, 2019

Does your nonprofit organization dread the annual arduous task of compiling expected revenues and expenses for the next year? Is the annual budget falling short of its potential to play an integral part in the organization’s strategic plan? If the answer to these questions is yes, then it might be time to take a step back. Afterall, the budget is only one component of a successful financial plan.

A financial plan links the organization’s mission with the resources available to fulfill that mission. To do this successfully, it is important for the plan to look at the past, present, and future. A good financial plan would include a minimum of three years:

  1. The current year (actuals) provides timely information about activities that can highlight what is working and what may not be working.
  2. The planning year (budget) helps provide focus for future activities
  3. Future years (forecasting) help an organization prepare for growth.

All three legs of the financial planning “stool” are necessary for balance and success.

To build a successful financial plan, start with the following:

  • Understand the organization’s sources of revenue. Are there dependencies or vulnerabilities that affect current or future revenue sources?
  • Examine the past to help predict the future. Trends happen over time, not in one year.  Consider trends over several past years to determine if they are likely to continue.
  • Be honest about any expertise needed to accomplish the organization’s goals. Often support services such as legal, finance, information technology, and human resources are the last to be considered when resources are constrained, but these areas may be critical to the success of an organization’s plan.
  • Consider an ongoing cost study. A cost/benefit analysis of each program or business line can inform whether changes are needed or programs should continue. 

Once consideration has been given to the above, you are ready to develop the budget! The budget is based on the organization’s desired metrics. What story do you want to tell the board throughout the year? Consider the following:

  • Develop a realistic timeline for the budgeting process. The timeline can be communicated to everyone involved in the budget process in the form of a budget calendar, and it would provide adequate time for feedback, revisions, and multiple drafts prior to approval. Allowing enough time for thoughtful and thorough input is crucial to a successful budget.
  • Include the appropriate staff in the process. Who is responsible for spending? Marketing, development, legal, IT, programs, and operations all play a roll in annual spending and need input in the budgeting process. If they are not included in the process, it is difficult to accurately capture their resource needs.
  • Include realistic revenue and expense projections. A budget can only be a useful tool if it is realistic. Are there expected increases or decreases in revenue based on market projections or past trends? Are special skills needed that are not currently on staff? Have new laws or regulations affected budget line items?
  • Perform scenario analysis. If revenue or expense items are dependent on outside forces, then evaluating several “what if” scenarios may be necessary. For example, if revenue is dependent on market performance, then a significant drop in market value would affect anticipated revenues and require adjustments to expenses. Planning for these possibilities will help to ensure that the organization can react quickly to changes in external forces without sacrificing critical resources.

Forecasting is the final step in the financial planning process. It helps an organization be prepared to make adjustments when necessary. A one-year outlook misses long-term trends, leaving an organization unprepared for significant changes that could affect future plans. Consider the following:

  • Is there a multi-year grant or contribution that will come to an end?
  • Are changes in workplace giving or shifts in government support affecting the organization?
  • Are there building space constraints for growth or is there a balloon payment on the mortgage?
  • Will a significant investment in capital be necessary in the near future?
  • Are tax, audit, or regulatory items that need to be implemented on the horizon?

Capturing these known upcoming items will help prepare the organization to adapt in the future.

A comprehensive financial plan can help an organization achieve its goals and fulfill its mission. By linking mission and resources, it will also align staff on the key focus areas so that everyone is moving in the same direction. Built upon a framework with past, present, and future components, a good financial plan will help to ensure that an organization has the resources it needs to succeed and the ability to adapt when necessary.