Within the ever-changing world, Nonprofits face uncertainty when it comes to how societal, economic, and industry events may unfold in the future and how these events will impact their mission.
The good news is with the right mindset they can proactively tackle this uncertainty with confidence by developing robust financial and scenario plans. By taking calculated steps nonprofits can continue their mission-driven work today and into the future.
The best starting point for this journey will be to understand nonprofit financial management as forecasting becomes a powerful tool for gauging the future of the business. They can align their forecasted figures with potential fundraising events and grant applications to gauge the future of their mission statement.
Once you understand the financial management aspect we will then look at scenario planning as this powerful tool empowers nonprofit leaders to navigate future uncertainties. It provides a structured approach to making strategic decisions, considering both high-level plans and practical boots-on-the-ground execution.
By taking the right steps to future-proof your Nonprofit your business can stride forward with resilience and determination, even amid unpredictable times.
What is Financial Management?
Financial management is the practice of creating a business plan and ensuring all departments align with it. This powerful business tool empowers CFOs or VPs of finance to provide financial data supporting the long-term vision, investment decisions, funding insights, liquidity, profitability, and cash runway.
Due to the importance of financial management, many businesses opt to use ERP software as it streamlines financial functions, like accounting, fixed-asset management, revenue recognition, and payment processing. With the right software, you can get features that offer real-time financial visibility and help facilitate day-to-day operations to help your team be agile and effective at their work.
Objectives of Financial Management
Financial management encompasses various objectives with the sole purpose of optimizing a company’s financial health. Financial managers play a key role in achieving these objectives by maximizing profits by analyzing cost fluctuations, monitoring liquidity and cash flow, and ensuring compliance with regulations.
A great financial manager that has the required experience will develop well-thought-out and carefully crafted financial scenarios based on market conditions where they will consider the how and when of managing relationships with investors and the board of directors.
At its core financial management involves applying effective principles to enhance the company’s financial structure and performance.
Importance of Financial Management
Now that we know what financial management is and the baseline for its objectives, as it lays down the foundation for sound fiscal governance, let us delve deeper into the importance of this umbrella in business by looking at its 3 main pillars.
- Strategizing: This involves identifying the necessary financial actions to achieve short- and long-term goals. Leaders of Nonprofits can gain valuable insights into current financial performance so they can plan effectively for the scenario planning phase.
- Decision-making: Financial management aids business leaders in making informed decisions by providing up-to-date financial reports and data on relevant key performance indicators (KPIs). With the right software solution, this data can be accessed within minutes from any device anywhere in the world.
- Controlling: This ensures that each department understands its role in the financial well-being of the Nonprofit and that they know how they contribute to its overall vision by operating within budget and aligning with the company’s strategy.
With effective financial management, employees gain clarity about the company’s direction and have visibility into its progress.
Scope of Financial Management
So we have now covered what is nonprofit financial management, its objectives, and its importance to a nonprofit we will now look at the scope of work for financial managers and their teams by summarizing it down to these four major areas:
- Planning: Financial managers project the company’s financial needs, including maintaining positive cash flow, allocating funds for growth, and contingency planning.
- Budgeting: These managers allocate available funds to meet various costs, such as rent, salaries, raw materials, and employee expenses. They are tasked with managing reserves for emergencies and figuring out how the nonprofit can fund new business opportunities.
- Managing and Assessing Risk: Financial managers assess and provide controls for different types of risks, including market risk, credit risk, liquidity risk, and operational risk. Mitigating these risks is important as it ensures the company’s stability and financial health.
- Disaster Recovery and Business Continuity: Financial teams are responsible for establishing disaster recovery and business continuity plans to address potential operational risks and ensure crisis management practices are well-documented and implemented in the organization.
By focusing on these important areas it can be seen that financial management plays a vital role in guiding a company’s financial decisions by ensuring its financial stability and paving the way for the future to ensure sustainable growth.
Do you need a template for budgeting? Follow this link.
Strategic vs. Tactical Financial Management
There best way to simplify financial management is by breaking them down into 2 categories.
- Strategic financial management: This involves FP&A and visioning activities. Finance leaders utilize all available financial data to help plan future investments, identify opportunities to build a resilient Nonprofit organization.
- Tactical financial management focuses on daily transactions like monthly financial close, budget comparisons, and the ever-important compliance with auditing and tax requirements.
Both of these levels are the backbone for effective financial decision-making and ensuring the company’s financial health.
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Nonprofit Scenario Planning
In the unpredictable landscape of the nonprofit sector leaders have realized that scenario planning is a vital tool for organizations to navigate uncertainty and build resilience. It all begins with understanding the importance of accurate financials and forecasting to build a framework from your nonprofit’s baseline. But this is only the first step next it is time to incorporate these findings to create different, possible future scenarios and the potential hurdles that need to be overcome so they can plan the best way to navigate these foreseeable challenges.
Nonprofits need to follow a structured, step-by-step approach to future-proof their business while aligning it with their unique mission, values, and circumstances.
Step 1: Identify Key Drivers at Risk
- The first step in the process of scenario planning is identifying the key drivers that significantly impact the organization’s economics. These drivers typically fall into three categories: programs, operations, and funding. Examples of such drivers could include client demand, staff capacity, contract revenue, and foundation grants.
- To prioritize these drivers you will need to assess their level of importance and risk. Consider the nature of the associated risks, the likelihood of those risks happening, and the potential impact they would have on the organization and community if they did occur.
Step 2: Develop and Model Scenarios
- With these key drivers in mind, nonprofits can now set out to create scenarios that span the full spectrum of possible outcomes. Scenarios should be anchored on the drivers with high importance and high risk identified in the previous step.
- It is important to take into account external factors beyond the organization’s control, like changes in government regulations, economic recovery pace, and public/ donor sentiment toward your nonprofit’s mission.
- The goal of scenario planning is not to achieve precision but rather to gain a deeper insight and understanding of possible outcomes and plan accordingly.
- It’s easy to take a light-hearted approach when considering the outcome so it is important to do some soul-searching and dig deep to create a realistic picture of the worst-case scenarios as these scenarios are essential for effective preparation.
Step 3: Create a Portfolio of Actions
- Based on the developed scenarios, nonprofits can create a portfolio of actions to effectively manage each situation. These actions fall into three main categories:
- Appropriate for any scenario: Actions that benefit the organization’s impact and financial health regardless of the scenario.
- Smaller-scale and more flexible: Quick and reversible actions that can be implemented as needed.
- Larger and more permanent: Significant investments or cost reduction measures that may require careful consideration but could have a lasting impact.
- Each action should be assessed for its economic cost or benefit, quantifying potential costs or savings over the relevant time horizon. The guiding principles established earlier will be at the forefront of balancing financial considerations with the organization’s mission, staff, equity, and any other important factors that have been identified.
Step 4: Determine Key Trigger Points
- Finally, the hard part of the exercise is what comes next as it is not the reason why Nonprofits go into the business however for the business to remain relevant and continue to do their work they are the non-negotiable must-do’s in extreme cases.
- Once the clear trigger points have been identified that will prompt decision-making and action from the leadership team. They will indicate when specific hard actions need to be taken such as staff layoffs, changes to employee benefits, or program site closures.
- These points can be determined based on internal metrics or external events and serve as guardrails to guide decision-making throughout the crisis and its aftermath.
- Having these trigger points in place will expedite the decision-making processes and ensure the organization remains responsive and agile in the face of uncertainty.
I’m sure it is becoming clear that scenario planning is a powerful and valuable tool for nonprofits to navigate uncertainty and build resilience. By analyzing and identifying key drivers you can develop scenarios and create a portfolio of actions. From these actions you can determine trigger points so your organization can proactively prepare for a range of potential challenges. Aligning all planning efforts with guiding principles ensures that tough decisions can be made with clarity and communicated effectively to stakeholders. Nonprofits that embrace scenario planning will be better equipped to adapt, thrive, and continue making a positive impact on their communities, even in the face of uncertainty.
Scenario planning is like preparing for a wild roller coaster ride in the nonprofit world. You buckle up with your financial manager and use your guiding principles as your trusty seatbelt, and then it’s time to identify those key drivers that might send your mission on a loop-de-loop! But fear not, intrepid nonprofit leaders, you’re armed with best, moderate, and worst-case scenarios to handle those twists and turns.
Remember scenario planning is not about predicting the future, it’s about being as nimble as a pirate on a tightrope, you must be ready to adapt at a moment’s notice. Keep that scenario plan flexible so that when new info comes in, you can twist and turn to stay on course.
Does the above seem like a mountain to climb and you feel you don’t have the staff with the right skill set to help you climb the summit?
Look no further! LWI Consulting has the perfect solution for your Nonprofit. With our outsourced accounting services, you’ll experience significant cost savings while reducing the risk of fraud.
How do we achieve this? We assign a team of dedicated professionals to your Nonprofit, ensuring top-notch quality control through checks and balances. Our team consists of over 30 accountants across 18 states, each specializing in various roles, from bookkeeping to CFO services.
Our tailored solutions include cutting-edge tools like Sage for grant tracking, automation, revenue recognition, and an easy-to-follow audit trail. Let LWI Consulting handle your accounting needs, so you can focus on your core functions and watch your business thrive!
Visit our website now to learn more and schedule a consultation.