Building a Formal Nonprofit Financial Plan
Written by Amanda Bower | Published: September 21, 2023
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If you work in the nonprofit world, you probably know how crucial it is to have enough financial resources to support your charitable goals. Fundraising is a big part of what nonprofits do, and the money they earn is used for everything from keeping the lights on to attracting new donors. To make the most of their finances and ensure they’re on track to achieve their goals, decision-makers can create a financial plan for their organization.
So, what exactly is a financial plan? It’s a lot like budgeting but focusing on creating a strategy and tactics to help your organization reach its future financial goals. This is especially important for nonprofits because they operate on tighter budgets than for-profit businesses and don’t retain profits like other organizations.
Despite these challenges, nonprofits still manage to handle large amounts of money. In 2022, individual donors gave nonprofit organizations a whopping $319 billion. That’s why these groups must have a solid financial plan in place. By carefully strategizing how funds are spent, nonprofits can make the most of their finances and achieve their long-term goals.
Interested in creating an excellent financial plan for your nonprofit? Keep reading to find out everything you need to know!
4 Key Components of a Nonprofit Financial Plan
Depending on your organization’s specifications, your exact nonprofit financial plan might vary from another’s. But generally speaking, here are some key components of a nonprofit financial plan.
Missions and goals
Every solid nonprofit financial plan starts with a clean outline of the organization’s mission and goals. This can include goals related to causes and impact and financial goals (and how the two are connected).
That said, you might focus on the following.
This should detail all the sources of revenue for your nonprofit, including donations, membership fees, and earned income (such as from merchandise sales). While organizations like this don’t operate on a for-profit basis, they can still be required to manage large amounts of money. Revenue for nonprofits has soared in the past few years, with recent figures showing the total annual revenue for nonprofits is more than $84 billion.
This should include all of the typical expenses your nonprofit can expect to incur. This might include expenses for specific programs, administrative expenses, fundraising expenses, overhead expenses, and any other miscellaneous expenses.
This portion can detail an outline of your general fundraising strategy, including fundraising target amounts, grant application plans and schedules, and donor acquisition and retention tactics.
These policies, including financial reporting procedures, risk management, and financial success monitoring and evaluation, can govern managing money.
Develop Clear Financial Goals
In order to achieve its mission and ensure its sustainability, a nonprofit organization must have a well-thought-out financial plan in place. Financial goals are the backbone of a nonprofit’s financial strategy, enabling them to direct their resources purposefully and strategically.
nonprofits operate without a profit motive and rely solely on donations and grants, making it even more important to have clear financial objectives. By aligning their financial goals with their mission, nonprofits can ensure their resources are being utilized in a way that effectively serves their cause or community.
Additionally, nonprofits might operate with limited excess financial resources (since the funds earned are used for further causes), meaning there is less wiggle room for financial error. Financial goals help nonprofits allocate resources effectively while leaving a safety net to account for possible risks.
nonprofits are also obligated to stakeholders, including donors and beneficiaries, to use funds appropriately and demonstrate that they’re doing so. A clearly defined financial plan can help a nonprofit stick to its goals, use financial resources effectively, and transparently report on its financial operations to maintain trust and credibility.
A nonprofit can establish its financial goals by understanding what type of impact it wants to make and its associated costs. This is where the importance of financial forecasting also comes into play: it can help nonprofit decision-makers understand their organization’s financial future and what type of corrective action they need to adopt.
Establish a Budget
A nonprofit’s budget is separate from a financial plan: it’s a document that clearly outlines a nonprofit’s projected net income and expenses for a set period of time. However, establishing a budget is a component of any extensive financial plan.
What does a nonprofit budget entail? Set on a specific timeline (such as for a fiscal year), a budget will have key components, including projected income sources, expense sources, net income, reserves and contingency funds, and project-based budgets. It will also include budget priorities, outline key stakeholders, and ultimately be reviewed, approved, and passed.
Effectively managing expenses is essential for a nonprofit that wants to achieve sustainable financial success, and it can be a delicate balancing act. While it can be tempting to use funds for furthering causes, it’s still important to ensure all expenses are covered, including both expected and unexpected expenses.
Expense management in a financial plan means accounting for expenses, understanding the sources of expenses, and anticipating what costs might look like.
Here are some of the typical elements of expenses for nonprofits:
- Program expenses: A nonprofit’s programs and services will incur expenses. These costs might include educational materials, supplies, transportation, and compensation for staff involved in the delivery of a program (such as educators or counselors).
- Administrative expenses: These cover the general operational costs of running a nonprofit, such as rent, utilities, office supplies, staff salaries, and technology expenses. It will also include regular management expenses, such as payroll.
- Donor management expenses: These expenses might be related to managing donor relations and might involve printed materials and donor merchandise, for example.
- Financial and legal expenses: nonprofit organizations need to invest in their own financial and legal security, and expenses might include financial consulting, accounting services, and legal counsel.
- Training and continuous learning: nonprofit staff might need to undergo training, workshops, and other professional development to keep their skills sharp and enhance the organization’s ability to accomplish its goals.
- Reserve funds: Some nonprofits choose to set aside funds for contingencies, and this reserve fund can help with financial stability in times of uncertainty.
Cash Flow Management
Cash flow management refers to tracking how cash moves in and out of a nonprofit. It’s vital that these flows are correctly understood and managed to maintain stability, support causes, meet debt obligations, and plan for growth.
Cash management involves understanding where your nonprofit’s money is going, why, and how it’s entering the org. It also involves processing and monitoring cash inflows (such as donor fees and contributions), collecting payments optimally, and managing bank accounts (to ensure baking is effective and cost-effective).
Donations fuel a nonprofit’s financial resources, and donors often don’t just appear out of thin air. Managing donors is important to building sustainable, consistent income, ultimately allowing a nonprofit to accomplish its missions and goals. Because of this, donor management is also a key component of a nonprofit financial plan.
It involves collecting and organizing donor information, monitoring communications and interactions, and tracking donations and other financial actions (such as merchandise purchases). Donor management also involves relationship management: instead of simply receiving one donation and calling it a day, nonprofits can foster long-term relationships with donors to encourage ongoing future support (both financial and otherwise).
No Matter How New or Established, All Nonprofits Need a Formal Financial Plan
A solid financial plan can benefit even the most effective and well-established nonprofits. That’s because the best financial plans will take your org to new heights, allow it to best accomplish its goals, and ensure its financial success for years to come.
If you’re looking for an all-star accounting team to support your nonprofit as it builds its financial plan, we should talk. We’re hiline, a one-stop shop for all things tech-enabled accounting, and we provide a premium experience to nonprofits looking to take their finances to the next level.
Contact us today to get started.
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