Is Your Organization Planning for the Future?

In the face of changes brought about by COVID-19, remote work arrangements, modified travel arrangements, and virtual conferences and meetings, it is imperative that nonprofit organizations look beyond the current year fiscal planning/budgeting cycle and anticipate future changes to revenue streams and cash flows. Is your organization focused on long-term financial planning?

For various reasons, many organizations have experienced a decline in donor funding and programmatic revenue. The global pandemic, inflation, and the virtual environment have pressured nonprofit organizations to diversify funding streams and explore new avenues to deliver programmatic impact. To do this effectively, organizations need to look beyond the typical 12-month planning horizon and build financial models that take into account the dynamic environment that exists today.

Though the annual budgeting cycle remains critical to any organization’s success, it is just a starting point. Organizations need to evaluate strategic initiatives and priorities in light of any perceived risks. Then, they have to be willing to pivot by exploring new ways to fund operations, conduct programs, and serve their constituents. The evaluation should focus on a three- to five-year time horizon and should include a flexible financial model that can be modified as circumstances change in the future.

Ready to get started building your long-term financial model? Keep these best practices in mind:

1. Does your organization have a long-range strategic plan?

This is the starting point for developing the financial model for the future of your organization. A strategic plan is a road map that ensures your organization’s activities are aligned with its mission. Strategic plans can take many forms, but given the current environment, a good strategic plan should consider how existing funding streams and programmatic delivery could be impacted by potential issues on the horizon. These could include inflation, a continued hesitancy to travel, virtual versus in-person attendance at meetings and events, etc. The plan should contain an analysis and evaluation of potential new funding streams as well as shifts in spending habits to mitigate the effects of these headwinds. While it is certainly challenging to anticipate what might happen in the next three to five years, it’s important to consider how the global pandemic impacted the organization’s mission and how the resulting ripple effects might necessitate a shift in resources or highlight a need for additional funding.

2. Develop a “base case” three- to five-year financial model.

Once the organization has developed its roadmap, it’s time to create a financial model that represents the strategic plan. Most organizations can accomplish this with a simple Excel-based model. The model should always start with the current fiscal year budget. Then establish the “most likely” set of assumptions and outcomes-such as shifts in resources and additional funding sources-identified in the strategic plan and model the revenue and expense by key financial statement line item in the three to five year time horizon.

3. Vary the financial model to include best-case and worst-case scenarios.

Based on the initial base-case assumptions, identify the activities or events that could improve the base case, as well as anything that could worsen the base case. Then, model these scenarios. For example, your organization may choose not to include certain funding sources or revenue streams in the base case, but you may want to include them in a more optimistic or best-case scenario. Of course, any additional costs associated with securing additional revenue, such as fundraising or necessary spending, should be factored in. Similarly, if your organization derives a substantial part of its revenue from conferences, meetings, etc., and the base case assumes a continuation of these activities, then the worst case may take into account additional costs to hold virtual events, lower event registration revenue, etc.

4. Monitor cash flow.

Does your organization have a cash projection model to monitor ongoing receipts and spending against the plan? This is essential to ensure adequate liquidity, and it also acts as a gauge against the current year operating budget. The cash projection model should be updated at least quarterly based on changing circumstances. It should contain anticipated receipts and spending by major financial statement line item on a rolling 12-month basis.

5. Before preparing next year’s fiscal year budget, dust off the three- to five-year financial model.

Update the long-term model based on changing circumstances and new assumptions. You should take into account the funding pipeline, successful new funding and programming initiatives, etc., and adjust year one in the long-range plan accordingly. Year one can then be utilized as the starting point for the new fiscal year budget.

Developing a strategic plan and a long-range planning model requires involvement and cooperation from your organization’s executive leadership team, its board of directors, and committees. Given our rapidly changing, high-pressure environment, proper long-range planning can be a key attribute in your organization’s ability to perform its mission and ultimately ensure its survival.