Nonprofit leaders appreciate the value of strategic planning. They understand that organizational reimagining is done best with intention and method. Yet many often overlook the need for financial planning, which connects strategic goals to their financial implications.
Poor planning happens despite good intentions. Senior staff and board members welcome the opportunity to partake in visioning and values creation. They embrace their responsibility to take stock of organizational impact. They fall short, however, when they delegate financial planning to the finance director as part of the annual budget cycle. The result? Surprises, when programs don’t secure resources needed to grow, or when changes in direction open up a structural deficit.
A good financial plan plots a realistic route to fiscal health. It makes visible whether, and how, an organization is achieving its financial goals. It anticipates the goal of sustainability, but recognizes that the direction of travel won’t always be a straight line. It enables flexible decision-making by identifying targets that have been missed or exceeded.
Does your organization’s strategic plan include a financial roadmap for its business model and balance sheet? A strategy without an aligned financial plan is not a sound strategy!
Every financial plan needs these six critical components:
Strategic context: This is where strategy and financial planning intersect. Your financial plan should start with a statement that connects money to mission. It should explain how your organization’s goals will influence the need for more, or different, resources. How will revenue and capital be used to strengthen mission and programs?
Financial situation analysis: Your future strategic goals should be grounded in an understanding of historical financial trends and current realities. What are your organization’s business and balance sheet strengths and weaknesses?
Examine revenue, expense and bottom-line dynamics for your enterprise overall, and for the individual programs and administrative functions that comprise it. Look at balance sheet liquidity and resiliency; that is, whether you have sufficient working capital and one or more cash reserves.
Sustainability goals: Given your current fiscal situation and strategic priorities, what does your organization aspire to achieve next year, in three years, and longer-term? Perhaps you need to recover from a period of pronounced deficits and accumulated debt as the first priority. Maybe your organization is living a hand-to-mouth existence and strives to grow its base of support, so that it can pay salaries to attract and retain top talent. A thriving organization might be ready for a capital campaign to scale, or possess the resources to take a risk with uncertain financial returns.
Financial goal-setting examines and prioritizes major business challenges and choices. It defines the kinds and amounts of money — both annual surpluses and net assets — your organization needs to be stable and resilient. Ask yourself:
What would it take to achieve a viable business model, which means: does your revenue — from paying constituents and supporters — reliably cover your full costs, producing annual surpluses?
How does the balance sheet need to improve so that your organization has the liquidity to pay its bills on time and weather the unexpected? Do you have one or more reserves to manage risk, steward fixed assets, and respond to opportunities for greater impact?
Financial projections, with scenarios: Once you’ve set longer-term financial goals, you are ready to map out a plan to achieve them. Financial projections aren’t exercises in precision. They make hypotheses about future revenue, expenses and bottom line results. They plot out a set of assumptions about how earned and contributed revenue will increasingly and reliably fund operations and financial health over time. They provide annual milestones so you can adapt when things don’t go according to plan… and they won’t!
A good financial projection describes how drivers of your programs and business connect to revenue and costs. For example, what will happen if you serve more people, raise fees, increase your average annual donation size?
Consider creating a base-case scenario that includes your best-guess assumptions. Then, model a more “pessimistic” scenario and possibly, a “rosy” alternative. These kinds of “Goldilocks” (too hot, too cold, just right) projections are great because they show how results change when key assumptions change.
Many organizations find that their business model alone can’t generate enough cash to support savings and facility reinvestment goals. Financial projections can help you identify the need for special fundraising. They help explain to informed donors the scale and timing of longer-term capital needs.
Key performance indicators: Consider creating a dashboard with a reasonable number of metrics. (You’ve gone overboard if they don’t fit on one readable page!) KPIs help illustrate your organization’s progress toward its goals. These metrics, tracked annually or more regularly, will help you understand when to double down on a strategy that’s working, or course-correct when an approach runs aground.
Pick metrics that are specific, meaningful, and easily measured. If you want to know whether your programs and operations are contributing to financial health over time, make sure “operating surpluses” and “months of unrestricted liquidity” make the list! Your dashboard should connect financial results to mission-related metrics, so you can evaluate whether available resources support desired program outcomes.
Case for support: Your numbers alone won’t win you many loyal supporters. Indeed, few donors will jump out of their seats to give you a cash reserve for long-term sustainability. What story will you tell to generate excitement about your plan? A case for support should explain why your work matters first, before you dive into the resources you need to do it well.
Before you make a specific pitch, do your homework to understand the interests and capabilities of your prospect. Don’t assume all funders are the same. As the saying goes, “if you’ve met one funder, you’ve met one funder.” Evaluate:
Which of your funders reliably provide project money? Set your sights on creating and communicating the need for full-cost project budgets with them. Over time, these supporters can be converted to pay a more reasonable share of program-support or overhead costs.
Who among your supporters might be a source of unrestricted dollars, which signal trust in your leadership and strategy?
Who are potential balance sheet investors — the board members and long-term donors truly committed to the sustainability of your long-term strategy?
As you embark on this work, remember that your organization’s financial realities and needs will frequently change in response to community and sector trends. Your financial plan should be flexible: sustainability is not a destination, but a moving goal post.
So go ahead, get started. Embrace your inner geek! Your mission will thank you.