Non-profit organisations (NPOs) have many of the same financial challenges that profit-seeking businesses do, such as increasing revenue, managing audits and dealing with compliance.
By managing and planning finances, you can maximise the return of your activities.
The difference between NPOs (and related organisations such as charities, foundations and social enterprises) and profit-seeking businesses obviously comes with the word ‘profit’.
You’re not looking to maximise profitability but instead maximise the impact of pursuing social or philanthropic goals, while keeping on a firm financial footing.
This means you have unique challenges to face, which we will explore in this article.
What is financial planning for NPOs?
Financial planning for NPOs is about optimising your activities by carefully managing every aspect of your finances. This includes many of the same challenges as private sector companies, such as increasing revenue and dealing with budgets.
But there are unique complexities in financial planning for NPOs. Expectations from both the public and government mean NPOs can be the target of constant scrutiny.
You also need to deal with a focus on performance metrics that has come from their increasing use in the private sector, even though you might not have the same financial and physical resources.
Why financial planning is important for NPOs
Accounting and financial management strategy is usually informed by how far users are engaging with the NPO’s services, and targets are set by trustees.
Stakeholders for an NPO require this type of information to measure whether operations are succeeding or not, and how much to invest in them.
This data needs to be collated in an accessible format, as it’s important in making decisions and judgements relating to the ongoing financial strategy of the NPO.
Financial planning for NPOs can be difficult, as there are certain issues that will present unique challenges to you, such as specific reporting requirements.
You may not have management or staff with financial expertise, for instance. Or you may have thin or part-time staffing, tools with limitations such as spreadsheets, or teams that are working across different locations.
However, there can be significant problems for an NPO that is poor at financial planning. Good investment and funding opportunities could be missed. Your organisation could quickly lose donors and the trust of your stakeholders if they think you’re not careful with money.
Coronavirus (COVID-19) was a wake-up call for many financially unstable NPOs. There are many issues but when you tackle them, a lot of these are easy to fix and technology can play a big role in helping you overcome these.
‘What good looks like’ when you manage financial planning well
An NPO with the right processes and technology in place should have the capability to deal with unexpected events via tight controls and compliance, as well as have the finances in place to make the most of new opportunities and achieve the goals of the organisation.
Ideally, you’ll be able to distribute financial responsibilities to contributors and managers throughout your NPO, regularly refreshing plans and forecasts to keep on-course. You’ll also be able to separate balances by grant, fund or donor.
At a minimum, you must have transparent financial reporting. This might mean streamlined auditing with online financial software that can support remote audits.
Transparency is essential for securing and keeping donors and sponsors on board.
And finally, top-quality financial reporting and analysis can differentiate you from other organisations in your segment when looking for funding.
Quick access to deep financial insights in real time can ensure you have the information at hand to present and secure this funding.
Steps that NPOs can take to improve their financial planning
1. Get your fundamental accounting right
For NPOs, standard accounting and financial management can be complicated. You’ll need basics such as accounts payable and receivable, but you’ll also have to provide standard documents such as a statement of activities, statements of financial position, and a statement of cash flow.
One area of accounting that you’ll find especially relevant is revenue management, because of the way revenue is recognised. Since you may collect annual dues or periodic donations at different times of the year, you may have to decouple cash receipts and disbursements from revenue recognition.
You may depend on dozens or hundreds of donations, fundraising and grants, leading to multiple income streams. Each donor may want to know how their investment in your mission is faring.
You may also need to isolate the activity for each revenue source, which allows you to create a regular series of specific reports, each with unique requirements, for each source of funds.
To make your job easier, look for push-button consolidation, allowing you to perform fast month-end closings in minutes, rather than weeks, and provide you with useful real-time analytics.
2. Be vigilant with your money
In an NPO, you must be especially vigilant with donated funds, monitoring everything you spend.
Software can really help an NPO to report accurately and be accountable to stakeholders. According to our research, there’s still a massive reliance on spreadsheets — 39% of respondents still exclusively use Excel or paper-based accounting methods.
You’ll find spreadsheets don’t offer the centralised control and distributed responsibility you need. You’ll need to use software that allows you to create internal controls, reporting and financial monitoring, managing money by grants/donors, programmes, geographies and other dimensions. Role-based dashboards will also be useful in giving people different visibility depending on their role and responsibilities.
By decentralising the planning and control process, you can achieve a granular level of accuracy. Setting budgets for each event, campaign, programme and funder — and then tracking the actuals — creates tighter controls and helps prevent unexpected outcomes.
3. Provide the right reports to your stakeholders
Just as a business needs to provide transformation information to shareholders and regulators, you’ll need to offer customised slices of results and reporting tailored to the requirements of each trustee.
If you have multiple sources of funding, each funder may want to see their information in a unique way to see how their investment is getting on.
With a lot of funders, this might mean hundreds of monthly, quarterly and annual reports, which you’ll need to automate unless you’re willing to spend hours of work on low-value activities.
Look for software with reporting capabilities that are flexible and customisable.
4. Make sure your reporting is transparent and visible
NPOs face tight controls and requirements when it comes to reporting transparency — you’ll need to know and show what is happening at every stage of your operations.
If you’re still using spreadsheets, a process such as an external audit could be incredibly time-consuming, with auditors required to meet on-site for an extended period. With a shared accounting system, you can provide logins for these auditors to work off-site.
Internally, you may have NPO board members who come together to review the status of your organisation, and this will, of course, include financials. You’ll need to provide the reporting and analysis that they can dig into and understand.
Financial planning equals stability for NPOs
Your financial planning is crucial in building the stability and flexibility of your NPO, supporting the campaigns, programmes and staff that are required to be successful in your mission.
If you’re working to support the finances of an NPO, hopefully some of these tips will be useful in improving the financial planning of your organisation both now and in the future.