Each organization is different, but every one of them is likely to face challenges when planning for the future. Cash flow is crucial –no business, including a nonprofit, can survive without proper funding. However, many times people are concerned about the day-to-day activities of an organization and don’t pay attention to planning ahead. This issue has become even more important now that FASB released a new guideline requiring nonprofits to show how they can pay their bills in the next 12 months.
Check out 5 ideas that nonprofit managers may consider when conducting financial planning for an organization:
1- Use a budget
Budgets should be prepared before the year starts. Small organizations could use the prior year’s income and expense numbers as budget numbers for the following year. Once a budget is set up, then income and expenses should be compared to the numbers to be sure the organization is on target financially. Running a nonprofit without a budget is like shooting in the dark. It’s too easy to forget details and to end up with no money at the end of the year.
2- Pay attention to the timing of your cash flow
Cash is king in the nonprofit world. Without cash, an organization cannot pay its bills and must close or merge with another nonprofit. Timing is crucial, not just the amount of funding. For example, if an organization has a big bill to pay in August, but the money to cover this expense will be received in November, the nonprofit must deal with this shortage and start planning for it months in advance.
3- Consider getting a line of credit BEFORE you need it
Since funding can be cut or reduced with not much prior notice, nonprofits should get a line of credit from its bank. The best time to apply and get such line of credit is before the nonprofit needs it. This money could be used if funding is delayed or to cover a planned short-term cash shortage. Inquire about special lines of credit for nonprofits, which may have a lower interest rate and more favorable terms.
4- Educate your board of directors on financial literacy
Many organizations have very involved directors and officers, but they may not have the financial knowledge required to run a nonprofit. Therefore, such leaders should get a basic understanding of finance to evaluate reports and to hire and staff the accounting department properly. Some boards hire an outside consultant to come in a few hours a month or a week to supervise staff and resolve any problems before they become major. It’s an option, but the board must understand what is going on.
5- Allow for surplus
When planning, be sure to consider a cushion for the unexpected. This could be 2-10% of the total budget for a year, or an amount or percentage agreed by the board. This surplus, also known as “reserve,” is to be used for emergencies or unexpected costs, and is usually replenished once used up. The plan should be NOT to use these funds, but to have them, “just in case.”
Financial planning for a nonprofit can be a bit of a challenge, but it should be done to maximize the chances for survival and growth of a nonprofit. Without planning, small organizations may get by, but may not be ready for unexpected funding cuts. Making financial planning a priority can help your nonprofit to go in the right direction and make a difference in the community.
Nonprofit Finance: A Practical Guide – Book nominated for the 2016 McAdam Book Award
What you need to organize a nonprofit well – Article-Blog