How Nonprofits Can Use Financial Forecasting to Make Decisions
Financial forecasting is essential for nonprofits and social entrepreneurs looking to scale their impact and plan for sustainable growth.
Forecasting empowers nonprofit leaders with insights that can drive better decision-making across the organization.
Here are a few ways it can help:
1. Align Financial Health with Mission Goals
For many nonprofits, there’s a tension between making sure the organization is financially healthy and staying focused on the mission.
Should I be keeping more in reserves or spending it on programs?
Financial forecasting helps bridge that gap by providing a clear picture of how much funding is needed to support the organization’s goals while maintaining financial stability.
A cash flow forecast helps nonprofit leaders evaluate the long-term impact of their programs and allocate resources more effectively.
If you’re more naturally inclined to stash extra in reserves, It can free you up to spend it on much needed investments or programs.
If you’re more naturally inclined to spend freely, it can show you the realities of your organization’s long-term financial outlook. It might cause you to pause and put a little more into reserves.
2. Make Confident Hiring Decisions
Staffing is often one of the largest expenses for any nonprofit.
And, let’s be honest…it’s getting harder to retain great talent without becoming more competitive with pay.
Forecasting allows leaders to predict when it’s financially feasible to invest in new roles or increase pay for key employees that can help drive their mission forward.
Instead of guessing whether hiring a new Development Director is the right move, nonprofits can rely on data to understand how that decision would impact cash flow, both immediately and in the long term.
With a rolling forecast that is updated monthly, organizations can adjust plans if revenue unexpectedly decreases or if expenses run higher than expected. This flexibility allows nonprofit leaders to act proactively, rather than reactively, when considering staffing changes.
3. Plan for Long-Term Sustainability
Every nonprofit wants to ensure that they’ll be around in 5, 10, or even 20 years to continue making an impact.
However, long-term sustainability is difficult without a forecast.
A good financial forecast helps nonprofits plan beyond the immediate term, enabling them to create sustainable plans for growth and avoid financial shortfalls.
By modeling out different scenarios, nonprofits can understand the implications of fundraising success, grant renewals, or economic downturns. If a major grant isn’t renewed, what adjustments need to be made?
Financial forecasting gives you the answers to those questions, ensuring your organization can pivot when needed and plan for challenges before they arise.
A forecast may not prevent all of the bad things that can happen to your organization, but it can help you avoid self-inflicted challenges. It can help you identify issues months ahead of time instead of too late.
4. Make Smarter Decisions About Programs and Funding
Nonprofits often face tough decisions about where to allocate resources.
Financial forecasting allows nonprofit leaders to identify which programs or services are providing the highest return on investment, not just in terms of mission impact, but also in terms of financial sustainability.
With a well-designed forecast, nonprofits can compare different program scenarios to see how funding fluctuations would impact the organization.
This helps identify areas where resources may be better utilized or which programs need to be scaled back if the forecast reveals future financial constraints.
A nonprofit might find that one program is particularly resource-intensive but brings in less revenue than expected. With a financial forecast, they could decide to shift focus to more profitable programs while still maintaining their mission.
5. Improve Relationships with Donors and Funders
Donors and funders want to see that their money is being well-managed and going toward achieving meaningful impact.
By incorporating financial forecasting into your nonprofit’s decision-making, you’ll be able to provide transparency and build trust with your supporters.
Let’s say you had $100 to give to someone. You ask two people what they plan to do with the money.
Person 1 came to you with a detailed plan on how they intend to spend it and what impact it would have on their life. Person 2 just says “I don’t really know, I just want the money”.
Which one are you more likely to give the $100 to?
Donors are more likely to support nonprofits that can show they have a plan for managing the money.
Remember, they have a TON of organizations they can give their money to. Don’t give them a reason to look elsewhere if they’re already intrigued by your mission!
This is especially true the bigger the donations and the longer term commitments that you’re looking for.
(And let’s be honest…we all want big $’s and long commitments!).
6. Respond Proactively to Financial Challenges
Financial forecasting allows nonprofits to anticipate potential shortfalls in revenue or increases in expenses.
Whether it’s preparing for a seasonal downturn in donations, a potential increase in program costs, or unexpected changes in grant funding, having a forecast allows nonprofits to respond quickly and avoid crisis mode.
By continuously updating the forecast, nonprofits can see early signs of trouble and implement corrective measures, such as adjusting expenses or ramping up fundraising efforts, before the financial situation worsens.
The Hartford cites a US Bank study that found that 82% of businesses fail due to poor cash flow management.
Nonprofits have to get cash flow management right or else the outcomes will also be the same for them!
The best tool to stay on top of managing cash flow is a forecast. It will help you see things months ahead of time so you still have time to take action.
Next Steps
Financial forecasting isn’t just about crunching numbers.
It’s a tool that empowers nonprofit leaders to make data-driven decisions, aligning their financial health with their mission, and ensuring long-term sustainability.
From planning for growth to mitigating risk, forecasting gives nonprofits the clarity and confidence to move forward strategically, knowing they are building a strong foundation for future success.
If you need help creating a cash flow forecast for your nonprofit, we're here to help. We can provide a custom forecast tailored to your nonprofit.
Book a free consultation and take control of your nonprofit’s financial future!
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