It’s commonly known that nonprofit organizations have different approaches to accounting compared to for-profit ones. Companies work to make a profit while nonprofits instead reinvest their money to fund a mission. However, it’s important to note that the two also have some similarities.
Both types of organizations should maintain a balanced budget and both require operational expenses to keep the doors open. Both need to pay their employees fairly and competitively to prevent turnover. And, both require accountants and automation solutions to operate as efficiently as possible.
It’s clear to see that in order to succeed, both nonprofits and for-profits need an effective financial plan.
Especially in a time of economic turbulence, a financial plan can make all the difference for organizations to weather the storm and come out on top.
However, this plan will look different depending on the type of organization and the operations of the organization itself. For instance, nonprofits in particular cannot forget these five essential steps:
Budget according to past data and goals.
Consider your overhead expenses.
Rely on and create an organized system.
Make well-informed decisions.
Maintain transparency with supporters.
Whether you’re new to financial planning or you’re a seasoned planner, it can help immensely to have a professional guiding your way during the process. Outsourcing your nonprofit accounting services will ensure you have a team of experts by your side who are willing to go the extra mile for your organization.
During a time of economic turmoil, what could be better than that? Let’s get a closer look at these five essential steps.
1. Budget according to past data and goals.
You’re probably familiar with the importance of a budget for your nonprofit’s financial success. One mistake that many people make as they craft their budgets is being too “optimistic” in their estimates for expenses and revenue. Too many organizations overestimate their potential for fundraising while underestimating the cost of nonprofit expenses.
In order to prevent this from happening to your organization, be sure you’re grounding your budget by basing your estimates on past data. For instance, consider the following examples:
Let’s say you're planning the budget for this year’s annual gala. If last year’s event cost you $10,000, it’s not probable for it to cost $7,000 this year unless you’re planning drastic cuts. Look at the previous years’ events to get an idea of how much this year’s will cost.
Let’s say you’re planning your programming budget for the entire year. So long as your organization remains the same size, your programming will probably cost about the same as it has in the past. Therefore, take into account the growth or shrink of the programs along with your historic expense data when crafting your budget.
As you’re creating your budget and anticipating your fundraising revenue, don’t forget that your fundraising goals should always directly connect to your philanthropic goals. Remember that raising money to make ends meet isn’t your end-game, but also don’t bite off more than you can chew. Instead, come up with objectives for your philanthropy and programming, then see if you’ll be able to realistically achieve them based on your fundraising history.
re:Charity’s guide on nonprofit fundraising strategies can help you dive deeper into the fundraising aspect of your organization’s revenue generation objectives.
2. Consider your overhead expenses.
Overhead is frequently discussed and disagreed upon as a topic in the nonprofit sector. Put simply, your overhead expenses are the operational costs that it takes for your nonprofit to function and keep the doors open.
Many individuals, particularly those who don’t work in the nonprofit sector, believe that it’s not right for organizations to spend much of their funding on overhead expenses. They want the money donated to make a direct impact on the mission. However, in order to continuously create a larger impact on the mission, nonprofits must support themselves and grow, which requires an investment in overhead expenses.
Changing the viewpoint on nonprofit overhead is the first step to creating an organization capable of growth, especially in your financial plan.
Consider overhead expenses such as:
Employee compensation. According to this article, fair and competitive total employee compensation is one of the leading factors that prevent turnover and improve staff retention. If you don’t pay a competitive rate, turnover occurs, and your organization spends more on the hiring process to replace those individuals.
Office expenses. A productive office environment ensures your organization has a suitable place to go to work every day and get their tasks done efficiently. However, the rent and utility expenses are a consistent fixed cost for your organization. Make sure to invest in a workspace that you can use now and in preparation for growth in the future.
While overhead expenses are necessary, be sure not to needlessly overspend on it when creating your financial plan. However, you should also realize the worth of overhead expenses, and not cut the things that will result in a better long-term financial outcome.
Striking this balance can be tough. If your organization is having trouble with it, you may consider asking a professional about the appropriate approach.
3. Rely on and create an organized system.
Effective organization techniques are key for creating a successful nonprofit financial plan. Make sure you’ve organized your financial data so that you’re able to stick to the financial plan and budget you create.
To keep your financial data organized, ensure it’s saved in a specific location and easily accessible for your organization’s decision-makers. For example:
Use software that will automate financial tasks like bill pay.
Employ financial software with an intuitive interface like QuickBooks to keep your general ledger updated and your reports saved.
Monitor your invoices and keep them saved in a place where you can revisit them later.
Generally, your bookkeeper will be the one to collect relevant financial information for your nonprofit. According to Jitasa’s nonprofit bookkeeper article, this is the person who will be inputting data, recording one side of transactions, processing payroll, and allocating costs.
Ensure you have the resources, technology, and processes in place to keep this information organized and ready to act upon. Hiring or outsourcing a professional bookkeeper could help your organization get these processes together and maintain the organization in the long-run.
4. Make informed decisions.
Chances are, your nonprofit is scrambling to create a financial plan that will help you get through these difficult economic times. Or, maybe you’re less worried about the economic turmoil, but want to plan for a major campaign or project in the future.
In these cases, it might be time to consult a professional accountant within your industry to help make informed decisions. For example, an accountant could advise you on:
Programs you can take advantage of in order to get through these difficult times.
Places in your budget where you can make cuts to best account for a troubling economy.
Whether or not you have the financial capability to complete a large project for the organization.
If it would benefit your nonprofit to conduct an audit of your financials.
Bookkeepers will help you keep your information organized while accountants will help you make important decisions based on that information. Both roles are vital for a successful financial plan for your nonprofit.
5. Maintain transparency with supporters.
Your supporters value transparency. If they give their hard-earned money to your nonprofit, they want to know that you’re using it in the best and most responsible way possible. Therefore, make sure you’re financially transparent with your financial plan.
When you’re explaining to supporters what your nonprofit spends it funding on, be sure to put everything in terms of impact. For example, you might say that launching X campaign would fund the new Y program.
Have a plan to explain your financials to your supporters. On top of regularly updating your donors, many organizations choose to conduct and send out an annual report every year. This provides information on the impact that your nonprofit has made as well as the financial success (or failures) you’ve had.
Your nonprofit’s financial plan should be specific and measurable. Additionally, it should focus on what your organization can accomplish based on past efforts. Be sure your nonprofit is financially ready for the coming year with an effective and well-thought-out plan.