Many of the same financial issues that profit-seeking enterprises face, such as increasing revenue, managing audits, and dealing with compliance, encounter non-profit organizations (NPOs).
By managing and planning finances, you can maximize the return of your activities.
The word 'profit' clearly distinguishes NPOs (and associated organizations such as charities, foundations, and social enterprises) from profit-seeking businesses.
You're not aiming to maximize profits, but rather to maximize the impact of pursuing humanitarian or philanthropic goals while remaining financially secure.
This means you'll face unique challenges, which we'll discuss in this article.
Financial Planning for NPOs
Financial planning for nonprofits entails optimizing your activities by meticulously managing all aspects of your finances. Many of the same issues that private-sector businesses face, such as raising revenue and managing budgets, apply.
However, financial planning for non-profits has its own set of challenges. NPOs can be the subject of ongoing scrutiny due to public and government expectations.
You must also deal with the increased use of performance indicators in the private sector, even though you may not have the same financial and physical resources.
Why is Financial Planning for NPOs crucial
The accounting and financial management strategy is typically influenced by the extent to which users engage with the NPO's services, and targets are set by trustees.
Stakeholders in a non-profit organization need this information to determine whether operations are successful and how much to invest in them.
This information must be compiled in an easily accessible format because it is critical in making decisions and judgments about the NPO's ongoing financial strategy.
Financial planning for NPOs can be difficult, as certain issues will present unique challenges to you, such as specific reporting requirements.
For instance, you might not have financial expertise amongst your management or staff. You might also have a modest or part-time staff, limited tools like spreadsheets, or teams that work from multiple locations.
However, an NPO with poor financial planning may face severe difficulties. Good investment and funding opportunities may be lost. If funders and stakeholders believe you aren't careful with money, your organization might swiftly lose support and trust.
Coronavirus (COVID-19) served as a wake-up call for several financially unstable non-profits. There are numerous concerns, but many of them are simple to address, and technology may play a significant part in assisting you in doing so.
How does Good Financial Planning look like in an NPO
An NPO with the appropriate processes and technology in place should be able to deal with unforeseen events through tight controls and compliance, as well as have the financial resources to take advantage of new possibilities and meet the organization's objectives.
Ideally, you'll be able to assign financial responsibilities to contributors and managers within your NPO, updating plans and forecasts frequently to stay on track. You’ll also be able to separate balances by grant, fund, or donor.
At the very least, you must have transparent financial reporting. This could imply more efficient auditing via online financial software that allows for remote audits.
Transparency is critical for attracting and retaining donors and sponsors.
Finally, when seeking investment, high-quality financial reporting and analysis can set you apart from other businesses in your industry.
Quick real-time access to detailed financial insights helps ensure that you have the data you need to demonstrate and secure this funding.
4 Steps NPOs can do to improve their financial planning
Master the basics of accounting
Standard accounting and financial management might be complex for nonprofits. Accounts payable and receivable are necessary, but conventional documents such as a statement of activities, a statement of financial position, and a statement of the cash flow will also need to be provided.
Because of the way revenue is recognized, one area of accounting that you'll find particularly relevant is revenue management. You may need to decouple cash receipts and disbursements from revenue recognition since you may collect annual dues or recurring donations at different times of the year.
You may rely on dozens or hundreds of donations, fundraisers, and grants to supplement your income. Each donor may be curious about the progress of their donation to your cause.
You may also need to separate activity for each revenue source, allowing you to construct a regular series of customized reports for each source of funds, each with its own set of needs.
Look for push-button consolidation to make your job easier by allowing you to conduct month-end closings in minutes rather than weeks and providing you with relevant real-time information.
Be vigilant with your finances
In an NPO, you must be extremely diligent with donated funds, closely monitoring every expenditure.
An NPO's ability to report accurately and be accountable to stakeholders can be greatly aided by software. According to current studies, spreadsheets are still heavily used – 39% of industry leaders use Excel or paper-based accounting systems solely.
But spreadsheets don't provide the centralized control and dispersed accountability you’ll require. You'll need software that lets you set up internal controls, report and track finances, and manage money across grants/donors, programs, geographies, and other dimensions. Role-based dashboards will also be useful in providing varying levels of visibility to people based on their roles and responsibilities.
You can attain granular precision by decentralizing the planning and control process. Setting budgets for each event, campaign, program, and funder, and then tracking the actuals helps to build tighter controls and avoid unexpected outcomes.
Provide the appropriate reports to your stakeholders
Just as a company must present transformative information to shareholders and regulators, you must deliver customized results and reporting that are targeted to the needs of each trustee.
If you have several funding sources, each funder may want to examine their data in a different way to understand how their investment is doing.
If you have a lot of funders, this may imply hundreds of monthly, quarterly, and annual reports, which you'll have to automate unless you want to spend hours on low-value tasks.
Look for software that has versatile and customized reporting features.
Ensure your reporting is transparent and visible
When it comes to reporting transparency, NPOs encounter strict regulations and requirements – you'll need to know and show what's going on at every stage of your operations.
If you're still utilizing spreadsheets, a procedure like an external audit could take a long time because auditors will need to meet on-site for a long time. You can give these auditors logins to operate off-site using a shared accounting system.
Internally, you may have NPO board members who meet to discuss the organization's state, which will, of course, include financials. You'll have to give them reports and analyses that they can dive into and comprehend.
Financial Planning Implies Stability for NPO’s
Your financial planning is critical in ensuring your NPO's stability and flexibility, as well as financing the campaigns, programs, and personnel needed to achieve your goals.
If you work to support an NPO's finances, hopefully, some of these pointers will help you improve your organization's financial planning now and in the future.