By Shane Bender
Are you part of a Non-Profit with cash flow issues? Are you struggling with decisions on spending such as hiring, benefits, development, and other operating expenses? How do you know when you can expand, build, or when to get more frugal?
Since starting my CFO Services business, I have had the privilege of working with multiple nonprofits, and I have seen some similarities and differences between the For-Profit and Non-Profit world. There are many more similarities than differences, so I strongly suggest that every nonprofit should have a forecast model.
1. Revenue Forecasting
All organizations need to understand the historical ways that revenue is earned. Although the way revenues are earned are different, there is still a need to understand the mechanics of income and then forecast that going forward. For example, some non-profits earn revenue from donations, other fees, tuition, government contracts, foundations, and other grants. Some non-profits have an endowment and earn revenue from Investment Income. It is important to understand these different revenue streams and timing in a forecast model. It is the first step to any good forecast model.
2. Expense Variations
All organizations have expenses such as personnel, general & administrative, marketing, and travel. Non-Profits can even have specific program-related expenses to run the organization. It is important to understand all the expense categories and forecast this out. A once a year budget is a good start, but a regular forecast can also be helpful, especially if the non-profit has inconsistent cash flow and is growing and expanding quickly. A budget is usually outdated once it is created. It is a great benchmark tool to compare, but a forecast model will allow you to assess more recent changes and adjust accordingly.
3. Cash Flow
Cash flow affects every organization. Once revenue and expenses are analyzed, it is important to gain a better understanding of cash flow. If the organization desires to acquire land, a building, or equipment, this also needs to be forecasted. If cash gets tight, there have to be adjustments to expenses and more of an effort to increase revenue.
4. Communication to Key Stakeholders
A forecast model helps communication to the Board, Elders (Church), Executive Team, and even key budget holders about what is going on and how to make adjustments. I find it most helpful to communicate regularly actual numbers compared to budget and the latest forecast model.
5. Decision Making
A forecast model helps leaders in any organization make good decisions objectively. When the numbers are forecasted based on different scenarios, they can make the best long term decisions with quantitative facts to help.
1. How Funds are Raised
Non-profits rely heavily on donations and various initiatives to be able to accomplish their goals. This requires fundraising activities and a donor relationship plan. Forecasting when donations are going to be received can be challenging, especially large one-off gifts. I find it helpful to understand all the key donors and historical giving patterns to help with this forecast. Also, pledging is a helpful tool for long term planning, although this is still very inaccurate.
Other revenue streams for nonprofits can be more easily tracked, such as tuition, contracts, investment income, and any other agreed upon fees.
2. Fund Management and Tracking
All donations and grants received for a restricted purpose must be tracked in a specific fund. The use of these funds has to be tracked in the same fund so you can provide reports to the grantor/donor. This is also required for generally accepted accounting principles (GAAP). It can also be helpful to have different funds/purpose categories for a donor to give toward. I would strongly recommend restricting this list of funds as it can get out of hand and very difficult to track administratively.
3. Compassionate Decision Making
Non-profits tend to be more compassionate concerning expenses such as implementing staff reductions when necessary. I definitely understand this concern. There is a tendency for everyone to take cuts rather than assessing lower performers or those roles no longer necessary at the same level of expense. It can be very different in the For-Profit world. Obviously, investors and shareholders do not have as much patience for spending too much in areas that aren’t necessary.
4. Endowments and Investments
Many non-profit organizations desire to grow an endowment so they can use the earnings for years to come. This is very appealing to many donors as their money can be continually helpful for the organization. Once donations are received for an endowment, an investment policy must be approved and the money invested accordingly.
Non-profits are created for a mission, so many times, there are many volunteers that help for the purpose of the mission. Board Members work for free, and sometimes employees take a significant pay cut for the mission. There is a balance between taking advantage of people and paying for their work. The motive is more about helping the community, sharing the Christian gospel, or providing an unmet need, so the goals can be very different. This difference does affect decision making and hiring. This motive can lead to getting labor and items (in-kind donations) for free.
Although I listed some differences above, I strongly believe that all non-profits should have a Forecast Model. Each of the key differences, such as how funds are used, fund tracking, compassionate decision making, endowments, and motive actually make a forecast model more useful. Although we desire compassion and have certain motives, a forecast model shows the quantitative aspect of these decisions. By understanding the different donor trends and revenue streams, you better understand the levers that can be pulled to improve cash flow. If you are raising funds for an endowment, understanding the potential investment income earned that can be used by the operating budget is helpful.
A forecast model is useful in many ways ,no matter how similar or different Non-Profits are from For-Profit Companies.
Do you desire to gain a better understanding of where you are today financial and where you are headed in your business? Would you like to reach your financial destination quickly? Do you desire to grow revenue, spend wisely, and manage cash flow? Check out the Forecast Your Future Course for more information. Also, check out my book Forecast your Future: How Small Businesses Exchange Stress and Chaos for Cash and Clarity.
Coming soon is my audiobook Forecast your Future: How Small Businesses Exchange Stress and Chaos for Cash and Clarity. If you want to hear more about this, be sure to sign up for my email list if you aren’t already.