9 steps to create an effective financial plan for nonprofit organizations

As a nonprofit, you face unique challenges, from securing consistent funding and managing tight budgets to navigating complex compliance requirements.

Unlike for-profit businesses, you must balance financial needs with your mission, often relying on donations, grants, and fundraising to sustain operations.

Careful resource allocation is key to covering both your administrative and programmatic expenses.

Without a clear financial plan, your nonprofit risks instability, which could threaten its ability to serve the community or even survive.

Philanthropic financial planning is crucial to making a lasting impact.

It helps maintain financial stability, optimize resources, and support the growth of your nonprofit’s mission.

A well-structured financial plan will guide your daily operations and lay the foundation for future expansion, allowing your organization to align its mission with financial health KPIs.

This guide will walk you through nine essential steps to create an effective financial plan for nonprofit organizations.

Why does your nonprofit need a financial plan?

If you’re wondering why your organization needs a financial plan, the answer is simple—it forms the backbone of your financial and operational structure.

A good financial plan should give your team the tools they need to set realistic goals, track income and expenses, and make informed decisions.

It helps you anticipate and prepare for financial and operational changes, adapting with confidence.

Strong financial planning also builds donor trust and supports long-term sustainability, allowing your nonprofit to maximize its impact, sustain programs, and invest in future growth.

Steps for nonprofit financial planning

Creating a financial management plan for your nonprofit is key to supporting its longevity and impact.

This process involves evaluating every aspect of your finances, from income to expenses, and addressing the “who,” “what,” and “why” behind each transaction.

To get you started, this guide offers a handy step-by-step outline of what to consider when building a comprehensive and effective financial plan for your nonprofit.

1. Understand your nonprofit model

Before diving into numbers, take the time to understand your organization’s structure and funding sources.

While generating profit isn’t the goal of your nonprofit, having the capacity to create profit allows your organization to reinvest in projects and continue fulfilling its mission.

Identifying your nonprofit’s primary revenue stream lays the foundation for your financial plan, guiding resource allocation, anticipating funding cycles, and managing income variability.

Common revenue streams include:

• Donations
• Grant funding
• Earned income
• Membership dues
• Program fees or service charges
• Corporate sponsorships

Knowing exactly where all your funding comes from will help your team build a stronger, more flexible financial strategy.

2. Align your budget with past performance and strategic goals

Budgeting is one of the top five internal challenges for nonprofit leaders, according to the 2024 Nonprofit Technology Trends Report by Sage.

A well-structured budget helps your nonprofit to allocate resources strategically, supporting a clear income and expense plan.

Reviewing past budgets and financial reports is the key to understanding spending patterns and identifying areas for improvement.

Analyzing historical financial data offers valuable insights into where funds may have been underutilized or overspent, helping refine your financial strategy.

As your nonprofit grows, relying on Excel alone may no longer be enough.

Upgrading to tailored financial planning software can further enhance the budgeting process by automating data collection and analysis, making it easier to identify trends and generate detailed reports.

With real-time updates, improved accuracy, and smoother reporting, your team can create a budget that truly supports your nonprofit’s strategic goals.

3. Analyze market trends and community needs

Like any other organization, it’s important for your nonprofit to keep up with external factors, such as economic trends and shifts in community needs.

For example, economic instability can lead to increased competition for funding, fluctuations in revenue streams, and shifts in donor behaviour that impact your potential income, priorities, and commitment levels.

Analyzing and keeping on top of these trends allows your team stay proactive, making sure your financial plan reflects your field’s current and emerging opportunities and challenges.

4. Account for overhead expenses

While program expenses are central to your nonprofit’s mission, covering overhead costs like salaries, rent, utilities, and technology is equally important for maintaining smooth operations.

Being upfront about these expenses in your budget helps donors and stakeholders understand the true costs of sustaining your organization.

Overhead costs can include:

• Employee compensation: salaries, benefits, and payroll taxes for staff members.
• Office expenses: rent, utilities, office supplies, and maintenance costs.
• Technology and software: accounting, donor management, and communication tools.
• Administrative costs: insurance, legal fees, and other general expenses required to keep the organization running.

5. Implement an organized nonprofit accounting system

Traditional accounting systems using Excel often involve a lot of time-consuming, manual tasks, such as downloading CSV files, copying and pasting data, consolidating reports, emailing files, and updating forecast models, formulas, and links.

Much of this work can be tedious and prone to errors, especially when multiple team members are working on the same spreadsheet.

Aside from the risk of mistakes, manging your financial information in this way also raises concerns about data security.

By contrast, effective, automated accounting software tailored for nonprofit operations removes the need for manual data entry and keeps your data safe and secure.

It enables accurate tracking of funds from various sources, categorizing expenses by program, and managing restricted versus unrestricted funds effectively.

Nonprofit-specific accounting solutions will typically also automate plan management, budgeting, and forecasting.

These tools consolidate and streamline reporting, simplify grant tracking, and enhance overall financial transparency.

They provide clear visibility into how your financial plan is built and aligned with your short-, mid-, and long-term goals.

6. Project income and expenses

Creating projections provides a roadmap for managing your organization’s resources over the next year or longer.

Accurate projections depend on a clear understanding of past performance and future goals.

Make sure your projections cover the following financial statements:

Income statement—Statement of activities

An Income statement summarizes your revenue resources and expenses over time, highlighting program efficiency and financial health.

Balance sheet—Statement of financial position

The balance sheet provides a clear snapshot of your nonprofit’s financial health by detailing its assets, liabilities, and net assets at a specific time.

This statement is an important tool for assessing financial stability, showing what your organization owns, what it owes, and its overall net worth.

Cash flow statement

Tracking cash inflows and outflows through a nonprofit cash flow statement is crucial for managing liquidity.

This statement helps to make sure your organization has the funds available to meet expenses when needed, supporting smoother operations and financial stability.

7. Evaluate underlying assumptions and conduct risk analysis

Financial planning is more than the numbers—anticipating potential challenges and creating a plan for them helps you navigate them.

Take a close look at your assumptions about funding, expenses, and operations to identify any risks or weaknesses in your financial plan.

Running scenario planning exercises can help you prepare for unexpected changes, such as funding cuts or economic downturns.

Additionally, setting up a contingency fund can provide a financial safety net, making sure your nonprofit stays resilient no matter what comes your way.

8. Foster transparency with donors and supporters

Transparency is at the core of building and maintaining trust with your donors and supporters.

From the start of the financial planning process, keeping clear and organized documentation of your financial practices is key.

Your financial plan should be measurable, with clear success metrics shared with donors.

Regularly updating them with financial statements, budget reports, and the impact of their contributions reassures them that their support is making a difference.

This step strengthens donor relationships and fosters continued support.

9. Track progress and update your plan

Financial planning for your nonprofits is not a one-time event; you’ll need to commit to ongoing tracking and adjustments.

Regularly reviewing performance, comparing actual results to projections, and adjusting your budget as needed give your team greater control over your plan.

Keeping your strategy up-to-date will also better enable your nonprofit to respond to changes, optimize resources, and continuously align financial goals with your mission.

Example of a financial planning for nonprofit organizations

To give you a clearer picture of how these steps come together, here’s a simple example of top-level financial planning for a nonprofit organization in action.

• Mission: imagine your nonprofit provides after-school programs for under-resourced children in your community.
• Annual budget: $200,000.

Revenue projections

Projecting revenue helps you establish realistic income goals. In this case, funding comes from multiple sources:

• Donations: $60,000
• Grants: $80,000
• Fundraising events: $30,000
• Corporate sponsorship: $20,000
• Membership fees: $10,000

Expense breakdown

Breaking down expenses enables precise allocation for your program needs and operational costs.

This example nonprofit’s expenses are:

• Staff salaries: $90,000
• Program supplies: $30,000
• Rent and utilities: $20,000
• Fundraising expenses: $15,000
• Marketing and outreach: $10,000
• Technology and software: $5,000
• Administrative costs: $30,000

Financial projections

Planning ahead helps your organization prepare for growth and manage risks.

In this example, the nonprofit plans toward both positive and negative outcomes to deliver contingencies for both.

• Expected surplus: $10,000 (planned for reinvestment into program expansion).
• Risk analysis: if grant funding decreases by 10%, adjustments to the fundraising strategy may be necessary to fill the gap.

Transparency strategy

The example nonprofit updates donors regularly, breaking down revenue and expenses into a clear annual report.

All stakeholders can see what has been done, and what is on the horizon.

Keeping your donors and stakeholders informed builds trust and encourages continued support. Consider these approaches:

• Quarterly donor updates: share program outcomes and financial status updates to maintain transparency.

Nonprofit annual report: include a detailed breakdown of revenue and expenses, with testimonials from program participants to demonstrate impact.

Monitoring plan

Regular financial reviews help keep your nonprofit on track and adaptable to change:

• Monthly budget review: compare income and expenses against projections to make timely adjustments.
• Annual financial review: reassess financial projections and refine strategies based on the year’s performance.

The example nonprofit lead with clear financial data and donor transparency.

It ensured both best and worst-case scenarios had a fully thought-out plan which can be refined as things change.

Offering ongoing budget insight and strategic beats that can be adjusted easily will help build confidence in your mission and help guarantee its success.

Final thoughts

A complete financial plan provides a roadmap to manage resources effectively, align budgeting with strategic goals, and maintain transparency with donors and stakeholders.

By following these nine steps, your nonprofit can assess its financial health, anticipate future needs, and adapt to change, fostering responsible growth and long-term resilience.

Looking for ways to simplify your financial planning?

Explore how our nonprofit accounting and management software can help streamline budgeting, optimize resource allocation, and improve oversight, so you can focus on making a greater impact.

Build a solid foundation for sustainable success and lead your nonprofit with confidence!

FAQs about nonprofit financial planning

1. Do I need a financial advisor for my nonprofit organization?

If you’re a medium or large nonprofit organization with strong financial teams and FP&A experts, you may not always need external financial advisors.

You will likely already have access to significant in-house expertise and be equipped with advanced financial planning tools.

However, a financial advisor can still offer valuable support by assisting with strategic decisions related to investment portfolios, risk management, tax strategies, and developing a comprehensive financial plan.

2. What financial metrics should I track for my nonprofit organization?

Monitoring the right financial metrics is essential for understanding your nonprofit’s funding model, revenue, cash flow, expenses, and debt management.

Key metrics to track include:

• Funding model and revenue
• Cash flow and sustainability
• Expenses and efficiency
• Debt management

By tracking these metrics, your nonprofit can maintain financial health, improve transparency with stakeholders, make better-informed decisions, and initiate strategic adjustments to support sustainability and growth.