Nonprofit organizations are unique in that they exist to serve a mission or cause, rather than to generate profits. However, they still require funds to operate and achieve their goals. Effective financial management is crucial for nonprofits to allocate resources effectively, act as good stewards of their resources, and comply with any applicable funding guidelines. One important aspect of financial management is projecting your nonprofit’s cash inflows and outflows. Let’s discuss the difference between nonprofit budgeting and forecasting, and provide tips for creating the most useful, effective, and accurate financial forecasts.
Nonprofit Budgeting vs. Forecasting
Nonprofit budgeting is the process of creating a plan for how an organization will allocate its resources over a specific period of time, usually a year. A budget typically includes expected revenue and expenses, and is used to guide day-to-day, month-to-month- and quarter-to-quarter operations and decision-making. Nonprofit budgets are often created annually, and are based on past financial data and assumptions about future revenue and expenses.
Nonprofit forecasting, on the other hand, is the process of predicting future revenue and expenses based on current and historical data, while integrating assumptions about future trends and events. Forecasts are typically updated on a monthly or quarterly basis and are used to monitor an organization’s financial health and cash flow while adjusting to any unforeseen circumstances.
While budgeting and forecasting are related, they serve different purposes. A budget is a plan for how an organization will allocate its resources, while a forecast is a prediction of how an organization’s financial situation will change over time. Both are important for effective financial management, but forecasting is particularly important for nonprofits, which often have less predictable revenue streams than for-profit companies.
Forecasting also allows your nonprofit to:
- Gain insights into funding sources and spending behaviors.
- Budget better
- Hire and allocate resources effectively.
- Track performance.
- Identify opportunities.
- Overcome challenges.
- Manage Risk.
- Quicker response to unforeseen events.
Forecasting ultimately leads to an organization with a better capability to fulfill its mission.
Tips for Creating your nonprofit forecast
Anticipate Income and Expenses
Before creating revenue and expense projections, it’s important to review past financial data to identify trends and the timing of revenues and expenses to inform your projections. Look at monthly income statements and compile a feasible estimate of what the next 12 month’s expenses and revenues will look like. Make sure to keep an eye on the timing of revenue and expense sources. Ongoing expenses such as rent, salaries, and fundraising/annual events should be easier to identify. Ensure you are knowledgeable about the sources of your organization’s revenues and when they can expect to receive them. Starting with what you know will help you to fill in the holes for other revenue and expense items. When in doubt, plan for suboptimal revenue and expense timing to ensure you are not caught off guard.
Use Scenario Planning
Scenario planning involves creating projections based on different possible outcomes. For example, an organization applying for government grants who is also waiting on a large private donation may use scenario planning to estimate their cash flow. Here, four different scenarios are possible. They can receive the grant and not the donation, the donation and not the grant, both the grant and the donation, or neither. Planning for these separate scenarios is a great way to stay ahead of any unexpected surprises. With proper scenario planning, your organization will be prepared for all of the outcomes which, in turn, will provide your organization’s management a pre-planned approach to any outcome.
Use Forecasting Tools
There are many tools available to help nonprofits create accurate revenue and expense projections. Many of these tools can compliment your current accounting system to give your organization more robust reporting capabilities.
Once your financial projections are completed, nonprofits should ask themselves, “What are the results telling me”? Should your organizational plan for more revenue sources? Should your nonprofit plan to cut expenses where possible? Will your organization need additional liquidity or should you make plans to set aside the excess cash in an operating reserve fund or high-yield instrument? An effective leader will use their projections to make prudent decisions regarding the future of their organization.
Projections are not typically a part of a nonprofit’s regular financial reporting, so there’s no need to include your forecast with your monthly financial package to government or grant agencies. However, sharing your short-term or long-term projections with potential donors, Board Members, and/or key stakeholders is a great way to maintain transparency. This can help build trust and confidence in your organization’s financial management.
Monitor and Adapt
Revenue and expense projections should be updated at least quarterly to reflect changes in the organization’s operating environment. Sometimes new funding sources appear, key employees leave, funding sources disappear, etc. No organization is exempt from unexpected surprises whether they are good or bad. Whenever a significant event happens in your organization it is important that you revisit and adjust your forecasts to reflect your new reality. Proper monitoring and adaptation will ensure that you are ahead of your organization’s financial position rather than your organization’s financial position being ahead of you.
Turn to Goldin Group CPAs for Guidance
Nonprofit projections are crucial for effective financial management. While nonprofits may have less predictable revenue streams than for-profit companies, accurate and well thought out projections help allocate funds effectively, act as good stewards of your resources, and ensures prudent strategic planning. Goldin Group’s outsourced CFO services includes projection services. Contact our team today to help your organization stay one step ahead of the unexpected.