Running a nonprofit organization is a rewarding experience, but it is also one that comes with great responsibility. In addition to scheduling fundraising events, collecting membership dues, managing volunteers, and applying for grants, nonprofit leaders must also stay on top of the organization’s financial health.
The first step in understanding your organization’s financial position is to get comfortable reading financial statements. An equally important next step is learning how to make financial projections. In this brief article, we discuss making accurate financial projections for your nonprofit.
What Is A Financial Projection?
A financial projection is a term used to describe a prediction about upcoming finances. Financial projections are used to form a reasonable estimate of costs, revenues, debt balances, and cash balances in future months. There is no set time period for making financial projections, but it is a nonprofit best practice to make projections through the end of the current calendar year.
In addition to forecasting financial health through the end of the year, there are also great benefits to creating a long-term projection as well. Long-term financial projections can help organizations understand where the entity will stand when it comes to income, expenses, assets, and liabilities next year, or even in five years.
Financial projections may also be called forecasts, although the term forecast typically refers to a short-term prediction. However long you choose to project into the future for your nonprofit, you will notice the following benefits:
- Identify opportunities – When you are able to look forward at your organization’s financial position, it makes it possible to identify areas for improvement. For example, looking ahead to the next two years may show you that between May and August each year, ordinary revenues exceed operating expenses. Since the goal for nonprofits is to reinvest all profit into the business, that highlights an opportunity to take on new projects or start new community programs in the summer months.
- Understand variances – When you have a cash forecast, annual budget, or financial projection, you can compare actual revenues and expenses to the predicted figures quickly and easily. Seeing variances in what you’re realistically collecting, or spending gives you an opportunity to rectify missing payments or transactions before it is too late.
6 Steps To Making Accurate & Feasible Financial Projections
By this point, you understand the importance of making accurate projections at your nonprofit, but you may be wondering how to get started. Predicting future cash flow and financial impact is an important part of a robust financial plan. Here’s how you can create your own financial plan in 6 easy-to-implement steps.
You can use accounting software, Microsoft Excel, a pen and paper, or turn to a nonprofit accounting expert for help formatting your financial projection.
- Review actual financials – Too often nonprofits create a budget or monthly cash projection based on what they are hoping to see, not what they can realistically expect. This is a mistake that leads to future confusion and disappointing results. Before getting into your financial plan, pull at least three years of past data. Look at monthly income statements and compile a feasible estimate of what the next twelve month’s expenses and revenues will look like.
- Make room for goals – Once you’ve filled in realistic revenue and expense projections, think about what you’d like to see happen in the next one to three years. Do you have plans to ramp up fundraising activities? Does the building desperately need to be pressure-washed? Do you want to start escrowing money for a second location? Fill in those “wish list” items, but be sure the timing, costs, and possibilities are realistic.
- Consider operating expenses– Operating expenses are unavoidable for all nonprofits. They include the electric bill to keep the lights on, gas for your volunteers’ delivery vehicles, and wages and salaries. A large portion of a business’s expenses are not controllable and periodically increase. Research utility and cost-of-living increases in your region to make sure you’re accounting for upcoming increases.
- Create a projection procedure – Once you’ve documented accurate past data and added realistic upcoming changes, you are at a great place to document the process. Creating a financial plan or cash forecast doesn’t do a lot of good if you don’t frequently compare the data to actuals and re-project based on new information. Take some time to write up the new financial projection procedure and share it with your team or third-party accounting service.
- Maintain transparency – Projections are not typically a part of a nonprofit’s regular financial reporting, so there’s no need to include your forecast with your monthly financial package to government or grant agencies. However, sharing your short-term or long-term projections with potential donors, Board Members, or investors is a great way to maintain transparency.
- Adapt and adjust – Be sure to review the current projection monthly. Update the future predictions when you become aware of changes and make notes about material differences between the forecast and actual transactions. If a part of your new system is not working, adapt, and note the change in your newly created financial projection procedure.
Final Thoughts
Keeping up with a nonprofit’s financial performance requires more steps than just monitoring basic financial reports. Creating an accurate and feasible financial projection will allow your nonprofit organization to be prepared for what’s next and maximize new opportunities to serve and grow.
As you reach new financial heights, don’t hesitate to reach out to JFW Accounting Services for help with financial reporting, software upgrades, procedure reviews, internal controls, or creating a simple and effective financial plan.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.