Category

Budget

Sep 14
0

Managing the Unpredictability of Nonprofit Budgets: The Right Software Makes a Big Difference

By | Budget, MIP Fund Accounting, Nonprofit | No Comments

Budgeting is tricky. At best, you get close to an accurate forecast. At worst, you’re wildly off. Corporations adjust budgets all the time. So do nonprofits. In fact, nonprofits have a tougher time budgeting because of the uncertainties surrounding their work and their finances.

Budgeting Can Be Tricky

Nonprofits are founded on a cause and a mission. While some do sell products or services, they do not rely solely on sales to support the budget. Most rely on donations, grants, and endowments to continue their mission, and that’s where budgeting gets dicey.

person sitting at desk in front of several computer monitors and pointing at one of them

Look, even companies get their budgets wrong. They can’t predict catastrophic weather conditions that ruin crops; geopolitical events that shut down shipping; or sudden quality issues that threaten their whole supply chain. Nonprofits face different uncertainties. Donors who once flocked to the cause find another cause to support. An economic downturn leaves once-generous givers unable to open their pocketbooks and donate, even if their hearts remain open to the cause. Grants can dry up. Federal funds can cease if Congress halts the money or diverts it elsewhere. Costs escalate.

Given all of these uncertainties, how in the world is your organization expected to budget with any sense of accuracy? Here’s where the right software can make a big difference. With the right software, past patterns can be tracked, analyzed, and used to predict the future. And while no software has an accurate crystal ball, the right platform can help with budgeting as well as analyzing best- and worst-case scenarios.

Plan for the Worst, Hope for the Best: Scenario Planning

You’re probably doing scenario planning all the time—you just don’t know it. It’s when you take an umbrella along “just in case” on your afternoon walk because a few clouds are on the horizon and the weather app predicts a 30% chance of rain. There’s a chance, so you plan for the worst by taking the umbrella along but hope for the best by keeping it rolled up and tucked under your arm.

The same goes for budgeting. Many organizations forget scenario planning when it comes to budgeting and instead believe that the budget they developed for the upcoming year is accurate. It may be, but more likely, unforeseen events will occur that tilt the budget higher (better results from fundraising events) or lower (the rent just increased).

Scenario planning enables you to put into practice both best and worst-case scenarios so that you have a budget ready no matter what happens. This enables you to think ahead, for example, should costs rise and funds dry up. What activities can be cut? How will you continue to pay for essentials such as salaries, rent, and insurance if major grants are discontinued or federal funding ceases? By thinking through each scenario, you have an action plan in place and can course-correct as the year progresses.

The same may hold true for surplus years. Should additional funds flow into the organization, you’ll have a best-case scenario ready to go. Either way, no matter what the future holds for you, you will be ready for it.

Diversify Funding Sources

Many nonprofits rely on federal and state funds, such as grants, to support their programs. Relying solely on these funds is risky. You cannot predict, for example, when such funds will be discontinued or reduced. A new administration or competing interests may result in a grant or funding source being completely shut off, in which case, if you don’t have additional income streams, your organization could face serious difficulties.

Additionally, even if funds are still earmarked for your organization, payment delays could seriously hurt your cash flow. It’s never a good idea to put all your eggs in one basket. Even if you feel that a grant is secure, you cannot be certain of it. Diversifying income streams is a smart idea for all businesses, including nonprofits.

Managing Restricted and Unrestricted Funds Carefully

Restricted funds are earmarked for specific program or activity lines, while unrestricted funds can be used for any expense. Nonprofits must have policies in place governing the use of both types of funding. Unfortunately, unrestricted funds are often in short supply. What then?

Some organizations have written guidelines allowing borrowing from restricted funds. Clear, unambiguous repayment terms must accompany such borrowing; you cannot shuffle money back and forth at will. Another idea is to build fundraising campaigns solely around shoring up your unrestricted funds. Such campaigns emphasize how the organization fulfills its mission so that donors understand why unrestricted funds are needed. And continually educating the public about how your organization manages its unrestricted funds, by being transparent in reporting your organization’s financial reports, is essential to generating goodwill and building trust with donors.

The Right Software Makes Budgeting Easier

So how do organizations run best- and worst-case scenarios and manage restricted and unrestricted funds carefully? With spreadsheets?

You know what we’re going to say—spreadsheets are not the answer. Sure, they’re easy and accessible, but as your organization grows, they become unwieldy. It gets harder and harder to manage them, the chance of mistakes through simple keying errors grows, and it’s almost impossible to get good reports and data visualizations from them.

Instead of spreadsheets, smart nonprofits use nonprofit accounting software to build and manage budgets, run reports, and gain visibility into their financial position to ensure they have a solid foundation.

MIP Fund Accounting offers a great solution for nonprofits seeking a true fund accounting platform. Unlike small-business accounting software, MIP Fund Accounting is designed for nonprofits. It tracks expenses and revenues by program line, helps you build solid reports for your board and constituents, and enables you to track the metrics that matter.

We’ve also found a great solution for nonprofits in Martus, a data reporting platform that works with MIP Fund Accounting to produce outstanding reports. When you need to build trust with donors and constituents, nothing beats good reporting on your activities. Martus with MIP Cloud enables you to build better budgets, generate reports, and improve planning thanks to its seamless integration and robust interface. Separately, MIP and Martus are great platforms. Together? A powerhouse budgeting and reporting solution.

The Future Is Unpredictable. Your Software Doesn’t Have to Be.

The future has always been uncertain. However, you can smooth out some of the uncertainty with the right software. It won’t solve all your budgeting problems, but it will give you the facts you need to make better decisions and build a better future for your organization.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Jun 26
0

Use Scenario Planning to Build a Strong, Healthy Budget

By | Accounting, Budget, Nonprofit | No Comments

We’re in a period of volatile federal funding and delayed reimbursements right now. The current administration’s push to tighten purse strings and cut waste and fraud has led to a slowdown in available funds, some of which nonprofits rely upon for their work. Add to this the rising costs of everything, inflation, and the decline in donor giving, and you’ve got many organizations feeling nervous about their financial future.

Instead of feeling nervous, feel prepared and ready to face the future with a strong budget forecast that takes these factors into account. Forecasting is the bedrock upon which solid nonprofit organizations are built. How do you accomplish this? With scenario planning. By using what-if scenarios, you can build budget forecasts that take into consideration the most likely situations your organization can encounter.

people in office using scenario planning

What Is Scenario Planning?

Scenario planning goes by many names: worst-case scenario, tabletop exercises, and what-if planning. All of this means using an imaginary, possible situation to think through your organization’s response. When it comes to budgeting, consider the most likely situations, and build your what-if scenarios against them.

For example, an education nonprofit may face the following what-if scenarios:

What if …

  • Our largest donor decides to give his money elsewhere?
  • The grants that cover our programs are not funded next year?
  • The large contract we have with the state is rebid, and we lose the RFP?

Other scenarios are possible, so brainstorm them with your team to identify the most likely your nonprofit may face. Perhaps it’s staff attrition or the need to move your operation to a new location. These and other scenarios all significantly impact budgeting and should be addressed as part of your what-if scenario budgeting.

For each of these scenarios, building a budget in response to “it happens” will help you anticipate and prepare for the worst-case scenario. If it doesn’t happen, you’ll have a rock-solid budget. If it does happen, you’ll be prepared and know what to do.

Budgeting Strategies to Address Uncertainty

Uncertainty is always with us. Smart budgeting strategies can make you feel more confident about navigating the future and what it holds for your organization.

Spend Less

It’s obvious, but something many organizations are reluctant to do is spend less. See where you can cut expenses. Ask managers to review their department budgets and find ways to reduce expenses. Even small efforts add up to a stronger financial position over time.

Adjust Staffing Levels

Some organizations find that they must adjust staffing levels to improve their financial health. Budgeting for the future may involve adjusting staffing levels, such as a temporary moratorium on adding new positions, or deciding not to fill vacancies if someone voluntarily leaves.

Shift Fundraising Efforts

Many organizations shift fundraising efforts to broaden visibility and donor engagement. Look for ways to move from uncertain funding to more certain opportunities, such as finding additional donors if your organization relies on one or two large donors, grants, or foundations.

Use Technology to Improve Forecasting

Nonprofit organizations can also tap into their existing technology to improve forecasting or look to new nonprofit accounting systems for better forecasting support. Integrating your donor relations (CRM) platform with your nonprofit accounting system ensures that data flows between the two systems, reducing manual errors and saving you time.

Many nonprofit accounting systems, such as Sage Intacct, offer AI-enabled shortcuts and time savers within the platform. You might not need to invest in new software. Explore how to get more from your existing platform.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

May 14
0

Budgeting During Leadership Transition – A Guide for Nonprofits

By | Accounting, Budget, Nonprofit | No Comments

There’s an old saying that the only constant in life is change. Changing leadership at a nonprofit organization can be a time of great opportunity. New leaders bring fresh ideas. However, this can mean shifting priorities and the budgets that accompany them.

Nonprofit financial leaders can help manage some of the uncertainty surrounding leadership changes through smart budgeting practices. These include stabilizing the financial position of essential operations, planning for transition costs, and maintaining flexibility.

Stabilizing Essential Operations

Nonprofit leaders establish organizational strategy and direction. From this basis, budgets and plans are made. When leadership changes, strategy can change too, which means new plans and budgets.

Because times of transition can be turbulent, it is important to bring stability to essential operations. This includes stabilizing core financial fundamentals. Ensure you have a strong cushion to cover operating expenses, such as rent, insurance, and salaries. Budgeting for emergencies is also important, as unforeseen expenses can occur during leadership changes.

One area to pay special attention to when building a stable financial core is new expenses. Try to avoid incurring new expenses during times of leadership changes. These may include adding new staff positions, launching new programs or services, or making major technology investments. Hold everything as steadily as you can until the new leader comes aboard and takes the helm.

Planning for Transition Costs

There’s more to planning transition costs than budgeting for a retirement or going-away party for the old CEO. Although it’s tempting to hurry the search team to find a new leader, it may take some time to find the best person to lead your nonprofit. During that time, an interim or fractional CEO may be required. This can be an unexpected transitional cost.

Another unanticipated transition cost may be search fees. Search fees may include the cost of an executive search firm or travel expenses for candidates who come to your office for in-person interviews. Budget for all anticipated expenses related to filling the leadership vacancy.

Lastly, don’t forget to conduct a compensation review for the leadership position. It may have been quite some time since you benchmarked the compensation for a nonprofit leader in your market and niche. After the benchmarking review, you may need to work with the human resources team to make the salary more competitive to attract the right candidate or adjust the benefits package. Either activity can lead to unexpected costs.

Maintaining Flexibility

Lastly, focus on maintaining flexibility. It’s easier said than done, right? Keeping an open mind and anticipating various scenarios can help you maintain a flexible budgeting approach.

We briefly touched on transitional financial planning—how the position may remain vacant for a while, requiring a fractional or interim CEO, or how a compensation benchmarking study may necessitate raising the salary or benefits package to attract a good candidate. These are great examples of maintaining flexibility during leadership transitions.

Other examples include watching for staff uneasiness with the transition. Staff loyal to the previous leader may be uncertain about their position with the newcomer. Consider how you might approach retention activities and incentives.

Donations may slip during times of transition too. Donors who liked the previous administration’s strategy may wonder if the new leader will do things the same way. They may withhold donations until they can see which direction the organization is headed. You may wish to proactively seek additional revenue sources or cut back on expenses until the transition is complete. This flexible approach also helps build that stable core that is essential to supporting an organization during times of transition.

Change Is Inevitable – Budget Stress Isn’t

Change may be inevitable, but budgetary stress shouldn’t be. A flexible, proactive approach to nonprofit budgeting, focusing on reducing expenses, holding off on new expenses, and planning for some financial uncertainty, is the best way to build a sound budget during the transition to new leadership.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

May 21
0

Why Your Nonprofit Needs a Financial Risk Assessment

By | Accounting, Accounting Software, Budget, Nonprofit | No Comments
person at desk with notebook, pen, and laptop and graphs showing high/low waves for risk assessment

A financial risk assessment is an annual audit of many areas of your organization’s financial preparedness and stability. Such an assessment looks at many areas of your company, including the overall management, human resources, facilities, finances, accounting, sales, information systems, and more. Here is why a financial risk assessment is vital for a healthy nonprofit.

The Purpose of a Financial Risk Assessment

Everything in life involves risk. That includes running a nonprofit. A financial risk assessment examines the current state of your business and identifies potential risks. It’s only after identifying risks that you can take action to address them.

You can conduct your own financial risk assessment; however, many find that obtaining outside assistance from their CPA, a nonprofit consultant, or another similar professional is helpful. Often, we are too close to our own business to see potential risks clearly. An outside perspective can cut through the familiarity of the everyday and see the gaps that we often miss.

Benefits of a Risk Assessment

A financial risk assessment provides many benefits to nonprofits by enhancing their overall operations and safeguarding their missions. It helps organizations identify potential risks, such as fraud or inefficiencies, ensuring that their funds and resources are managed effectively to achieve their goals. By addressing these vulnerabilities early, nonprofits can streamline their operations and make better use of their resources.

Conducting regular financial risk assessments builds trust among donors, board members, and the community. It demonstrates a commitment to sound financial practices, which can attract and retain long-term supporters. Additionally, these assessments ensure that nonprofits comply with legal and regulatory requirements, minimizing the risk of penalties or reputational damage.

Finally, a financial risk assessment equips nonprofits to navigate uncertainties like economic shifts or changes in funding sources. By preparing for these challenges, organizations can maintain their focus on their mission and continue to deliver meaningful impact.

Costs of Avoiding a Risk Assessment

Perhaps you’re thinking, “This is all well and good, but we’re so busy! We just don’t have time to stop and do a comprehensive assessment.”

Do you have time to address a big risk, like a cyber-attack? What about a trip and fall accident because you haven’t assessed the risk of a worn carpet in your reception area?

It’s like owning a car—do you ignore the knock in the engine until the car breaks down, or do you take it to a mechanic to get it checked out?

The costs of avoiding a financial risk assessment may include:

  • Mistakes in the balance sheet, such as liabilities not properly recorded or other mistakes that can muddy the financial picture, can be time-consuming to fix later.
  • Failing to conduct a physical inventory on a regular basis can lead to adjustments, negative equity, and other problems.
  • Missing or poor internal controls can lead to employee theft or mismanaged funds.

There are many more areas where failing to conduct a risk assessment can lead to problems. As you can see, it’s always better to prevent problems than to spend time later fixing them.

Other Benefits of a Risk Assessment

Other than avoiding scary problems, there are many more benefits derived from conducting a comprehensive risk assessment. The assessment can help you build your strategy, setting the stage for thoughtful decisions about where to invest for risk mitigation and where to step out in growth. It may also uncover untapped potential and lead to productive discussions about how your organization can expand.

Start Now

Don’t wait until the end of the year planning to conduct your assessment. You can start now. Pick one department or area of the company, such as finance or operations, and come up with a list of questions. Ask yourself what is working, what isn’t working, and what may be improved.

This is where working with an outside consultant can help. We’re happy to discuss your plan of action and the next steps for financial risk assessment and management.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.