Importance of Financial Projections for Nonprofits

Importance of Financial Projections for Nonprofits

September 24, 2014 by admin

When organizations look to the future, one of the first documents worked on is usually a strategic plan. While the strategic plan gives the organization a road map to get from where it is to where it would like to be, don’t overlook the importance of financial projections as well. Creating a financial road map helps ensure it is financially feasible for the organization to implement its strategic plan.

Because many nonprofits rely on funding that is often cyclical in nature, it is not uncommon for organizations to have one fantastic revenue year followed by one or two years of underfunding. Preparing financial projections for a minimum of 3 years will help to identify when funding shortfalls will happen and give time to plan the best way to counter them.

Financial projections should be prepared similarly to a one year budget, including a review of prior revenue and expenses, as well as looking at what should be anticipated for future years. The major difference between this type of forecast and a one-year budget is that it accounts for the cyclical nature of funding by ensuring the three-year projections have a mix of both lean and robust budget years. Sources of revenue and their anticipated timing should be considered in order to identify where budget shortfalls may occur.

Countering these shortfalls should not only include ideas for increasing funding, but should also include plans to reduce expenses. Benchmarks should be created in the projections whereas if revenues are not reached, certain expenses are lowered or cut altogether. Creating buy-in among leadership about where cuts may need to be made in advance gives an organization time to research and identify scalable cuts that will have less of an impact on the organization’s ability to deliver its mission.

It is not often that organizations are forward thinking enough to have planning in place to provide options for the down years. To do this successfully, management and the board need to work hand in hand to ensure that everyone is on the same page.

The relationship between management and the Finance Committee needs to be one where both sides do not always have to see eye to eye but can work together to reach a common ground. In fact, having varying opinions on how conservative or aggressive the projections are can be very beneficial to the entire organization. Having individuals who are unafraid to speak their mind, on both sides, will often ensure that the projections are neither too aggressive nor too conservative once finalized. Establishing funding projections should be seen as an opportunity to grow the relationship between management and the board.

Don’t let your projections become something that is created and put on a shelf. Encourage leadership to utilize and refer to the document throughout the year. Making the document part of board meetings and routinely benchmarking your progress against the projections ensures everyone is aware of the organization’s financial health. Tracking how closely actual funding mirrors your projections can also improve accuracy for future years.

Proper budgeting for the future is essential for both maintaining and growing any organization. If your organization does not have a history of creating projections for more than one year at a time you may need to discuss this with your finance committee, your accounting firm, or hire other outside help. However, taking the time and effort to forecast and plan for your funding projections now, can keep you from having to make hard choices down the road.