A Guide to Financial Planning for Nonprofit Organizations

Financial stability is a critical component of any successful business. It means more than just generating revenue—it means a balanced financial picture that indicates a business can continue to meet its directive and its budget. This is true for both for-profit and not-for-profit businesses.

When a business can maintain strong profitability, it is more stable because it has likely generated cash reserves to cover operating expenses in times of need (capital expenditure or a business slowdown both require cash, for example). Financial stability is important to lenders and investors, too. By demonstrating sustainability, strong cash flow, and cash reserves, companies are less risky and more creditworthy, allowing them more access to debt and equity markets for expansion.

Do nonprofits have to make profits?

Like a for-profit business, a nonprofit company needs to be financially stable to meet its goals. For a nonprofit, the goal is not about profitability, of course, but about providing a product or service that meets a more altruistic need. Whether the nonprofit’s mission is to provide homeless housing or a world-class music program, it needs to be financially secure to be effective in accomplishing its mission.

Since the mission of nonprofit organizations is to provide some societal or community-based greater good, nonprofits seek donations from like-minded sources to achieve their goal of delivering something of value to the community. Successful nonprofits might have large donor bases, a few generous donors, or both; some seek grants to fund their operations, while others, such as symphonies or museums, charge fees for tickets and memberships to augment their foundation efforts.

Regardless of a nonprofit’s mission, being “non-profitable” is not the goal for any nonprofit. However, a nonprofit must demonstrate financial stability to fulfill its mission. Even though the revenue comes in different forms than it does for a for-profit company, strong financial controls, measurement, and reporting should mimic a for-profit company in several key areas.

Financial strategies that create stability for nonprofits

To keep a nonprofit operating efficiently, organization leaders should have the same financial discipline and know-how as the leaders of commercial enterprises. Fiscal knowledge can help nonprofit leaders make better financial decisions, and this can be accomplished through internal initiatives that develop and foster financial accountability:

• Revenue and expenses. Organizations should understand the cycle of revenue and expenses. In a nonprofit organization, this is accomplished through an understanding of the dynamics and tendencies of its donor base and the schedule of its revenue-generating activities.
• Budgeting. Standard annual budgeting of operating expenses should be a requirement of each department. This will hold each line item manager responsible for their performance in meeting overall goals.
• Capital expenditure planning. Fulfilling the mission of a nonprofit often requires access to certain facilities or assets, and these necessitate effective capital expenditure planning. Every level of the organization contributes to the success of large capital investment, and funding depends on having a solid financial projection and plan.
• Cost accounting methods. Analyzing the performance of the event or the project is an important measurement to any business. Cost accounting brings you this understanding.
• Monthly reporting and reforecasting. Changes happen all the time, so it is important to continue to reforecast expected results based upon those changes.

Each department and line manager should participate in these processes as the sharing of information improves decision-making and, most often, financial results. For nonprofits, however, financial knowledge is sometimes lacking if managers do not have for-profit experience. The employees, while well intentioned and focused on the organization’s mission, are not always financially savvy enough to maintain long-term stability for their programs and services.

Depending on an employee’s experience, training may be necessary so that a deeper level of understanding brings awareness, accountability, and better financial controls. When employees improve their skills and contribution to the mission, the nonprofit’s financial knowledge also improves.

Benefits of good financial data and analysis

Improved data leads to improved decision-making. Nonprofits and for-profits both benefit from good financial data. In addition to personnel training, it might be necessary to invest in a financial data system that will reward a nonprofit organization with valuable financial data.

As part of becoming more financially savvy, an appropriate accounting system provides necessary data to guide fiscal decisions and meet donor expectations, board member needs, and civic interests. Unfortunately, the accounting systems of some nonprofits do not support the types of data that an organization needs, such as departmental statements, and budgets and financial analysis and reporting. An accounting system should include an element of finance and planning, and not merely provide accounting support. It would be an investment worth making for long-term operational stability.

Nonprofit financial data collection and decision-making need to mimic those of for-profit companies. With deeper financial knowledge at all levels of governance, a nonprofit will be more secure in its mission of service.

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