financial planning for sustainable … · financial planning for sustainable nonprofits ... explore...

Developed byNonprofits Assistance Fund

NONPROFIT FINANCIAL MANAGEMENT TRAINING

FINANCIAL PLANNING FOR SUSTAINABLE NONPROFITS

A central charge of nonprofit leaders is to simultaneously achieve impact towards the organizational mission while also fostering the organization’s financial health. While it may not always feel natural to link conversations about mission and money, an understanding of both the program and financial impacts of your activities is key to strategic leadership and management. In this workshop you will learn how to assess your organization’s current financial position and business model, discuss tools that assist in understanding budget risks and uncertainties, and explore frameworks for facilitating conversations that link money and mission. The focus is on comprehensive planning for nonprofit leaders.

Part of Nonprofits Assistance Fund’s Financial Leadership series, helping nonprofit leaders balance financial priorities, adapt to uncertainty, and steer their organizations toward a sustainable future.

© 2010 Nonprofi ts Assistance Fund 2801 21st Avenue South, Suite 210 Minneapolis, MN 55407 Tel: 612.278.7180 www.nonprofi tsassistancefund.org


OUR MISSION IS TO BUILD FINANCIALLY HEALTHY NONPROFITS THAT FOSTER COMMUNITY VITALITY

Sustainability looks different today. Meeting the challenge of a changed environment requires a deep understanding of how mission and money work together.

Nonprofi ts Assistance Fund’s fi nancial experts are here to help you strengthen your capacity to address unexpected events, fi nance new opportunities, and realize strategic goals. We fulfi ll our mission by helping you thrive.

HOW WE CAN HELP

Financial Advice:• When you need a trusted advisor, we are here to help. We can answer your immediatequestions, increase your understanding of your organization’s situation, and work with you to develop effectivefi nancial practices.

Nonprofi t Loans:• For us, it’s more than a loan. Our lending team understands the nuances of nonprofi ts. Wecraft fi nancial solutions for your unique needs and will stick with you to address the unexpected, setting you upfor success.

Trainings and Resources:• Having the right tools to manage your organization’s money is essential tosuccess. Our trainings and online resources will help you develop practical skills, engage in strategic thinking,and build advanced fi nancial management capabilities.

Financial Strategy Consulting:• At times, the issue is so complex you need a knowledgeable ally at thetable to help. Our staff consultants bring intense focus to your fi nancial challenges and deliver solutions anduseful recommendations so you can move forward with confi dence.

OUR TRAINERS

Kate Barr, Executive Director:• Kate leads the strategic direction of our organization, developed ourcore training curriculum, and is a popular national speaker, trainer, and writer on nonprofi t managementand fi nance. A former Senior VP of Riverside Bank, Kate holds a Master’s degree from Hamline Universityand is adjunct faculty at Hamline and the Humphrey Institute. She serves on the boards of NeighborhoodDevelopment Center, Partners for the Common Good, Western Bank, and the Cultural Data Project.

Steve Boland, Loan Offi cer:• Steve has previously worked for Congressman Bruce Vento and served asExecutive Director of Saint Paul Neighborhood Network, Summit-University Planning Council, and GreaterFrogtown Community Development Corporation. He holds a Master of Nonprofi t Management degree fromHamline and serves on the boards of Community Neighborhood Housing Services and Outfront Minnesota.

Curtis Klotz, CPA, Finance Director:• Curt has worked in the nonprofi t sector for over 25 years, both inprogram and fi nancial management roles. Prior to joining Nonprofi ts Assistance Fund, Curt served as VicePresident, Finance and Administration, for Comunidades Latinas Unidas En Servicio (CLUES) in St. Paul and asDirector of Finance and Administration at the Indian Law Resource Center in Helena, Montana.

Phil Hatlie, Loan Offi cer:• Phil has special expertise in charter school fi nancing and management. Previouslyhe served as Director of Finance and Administration for Greater Minneapolis Council of Churches and TwinCities Habitat for Humanity and Director of Operations for HECUA. Phil serves on the board of MN ConferenceUnited Church of Christ and on committees for Hearth Connection and Habitat for Humanity of Minnesota.

Janet Ogden-Brackett, Associate Director:• As Associate Director, Janet manages our program services.She previously served as Director of Operations and Financial Manager at Minnesota Environmental Initiativeand worked at a CPA fi rm. She has participated in the Minnesota Council of Nonprofi ts’ Leadership Instituteand is on the boards of LegalCorps and Family Tree Clinic and the fi nance committee of the Textile Center.

WHO WE ARE


3

FINANCIAL PLANNING FOR SUSTAINABLE NONPROFITS

GOALS FOR TODAY’S WORKSHOP

Gain analytical tools to assist in understanding an organization’s current1.financial position and current business model

Learn different techniques and approaches to having practical conversations2.critical to organizational decision-making

Explore factors to consider when scenario planning and multi-year budgeting3.through case examples


4

BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

Financial assets and obligations as of a specific date

Assets are what is owned

Current assets•

Long-term assets•

Liabilities are what is owed

Current liabilities•

Long-term liabilities•

Net Assets are equal to Net Worth, Equity, or Retained Earnings

Unrestricted, temporarily restricted, permanently restricted•

Change in Net Assets: surplus or loss amount from the Income Statement for•the same period

ASSESSING YOUR CURRENT FINANCIAL POSITION

All changes in Net Assets flow from the Income Statement.


5


6

DAYS CASH ON HAND

This calculation measures how many days’ expenses can be covered with the current balance of unrestricted cash.

DAYS CASH ON HAND

Cash and current investments

Daily cash required

Daily cash required = Annual expense budget minus

non-cash expenses, pass-through funds, and unusual,

one-time expenses / 365

*Unrestricted cash only

Example:


7

Cash = $65,570 + $57,800 + $26,000 = $149,370

Daily cash required = ($878,325 - $6,000 - $40,970) / 365 = $2,277

65 days cash on hand


8

CURRENT RATIO

An indication of the organization’s ability to pay obligations in a timely way (within 12 months). A current ratio of less than 1 can be an indication of a future cash flow problem.

CURRENT RATIO

Current assets

Current liabilities

Example:

Current assets = $256,500

Current liabilities = $197,203

1.30


9

NET ASSET RESERVE RATIO

The net asset reserve ratio measures the financial cushion an organization has in order to ensure the stable delivery of programs and services in the event of unforeseen circumstances.

NET ASSET RESERVE RATIO

Unrestricted net assets

Total annual expenses / 365

Example:


10

Unrestricted net assets = $282,945

Total daily expenses = $878,325 / 365 = $2,406

117 days of expenses available in net asset reserves


11

INCOME STATEMENT (STATEMENT OF ACTIVITIES)

Amounts of income and expenses for a certain period of time•

Resulting change in net assets – surplus (profit) or deficit (loss)•

Income categories

Support: voluntary contributions that can be cash or in-kind•

Revenue: income earned from delivery of goods and services•

Expense categories

Personnel expenses are usually the largest component of total expenses•

Operating expenses•

Program expenses•

Change in Net Assets

Variously labeled Surplus/Deficit, Profit/Loss, Excess of Revenue Over•Expenses, and other terms

UNDERSTANDING YOUR BUSINESS MODEL


12


13

RELIANCE RATIO

The reliance ratio measures an organization’s dependence on certain sources or certain types of income.

RELIANCE RATIO

Amount of largest type of income

Total income

SINGLE RELIANCE RATIO

Single largest income source (grant, contract, client)

Total income

Amount of largest type of income = $330,000

Total income = $905,549

36.4% of income reliant on one income type

Example:


14

CUNA (PROFITABILITY) RATIO

The CUNA ratio measures the amount of unrestricted net assets retained for reserves or organizational cushion. The target ratio depends on how much reserve or cushion is already on hand.

CUNA RATIO

Change in unrestricted net assets

Total unrestricted income

Example:

Change in unrestricted net assets = $27,224

Total unrestricted income = $905,549

3% of unrestricted income retained for

reserves


15

TREND ANALYSIS (YOU’RE HEADING SOMEWHERE)


16

TREND ANALYSIS (YOU’RE HEADING SOMEWHERE)


17

TREND ANALYSIS GRAPHICS


18

GAUGING RISKS TO YOUR INCOME BUDGET

What are general risks that could affect all funding sources?

What are risks specific to particular funding sources?

Funding Source

Current Reliance

Risks Unique to Source

Risk Treatment in Budget

DHS Contract 55% ($340,000)Unallotment, rate reductions

No discount, included at current funding level

Foundation A 6% ($35,000)

Likely not a good fit with new foundation priorities

$20,000 transition grant included

Individual Gifts 12% ($74,000)

Lots of small and mid-sized donors keeps risk low. Five at >$5,000 are biggest risk.

Forecasting 10% decrease

Workshop Fees 21% ($129,800)

Demand increasing, clients’ ability to pay may be at risk (minor)

Slight increase over current year


19

GENERATING AND UNDERSTANDING PROGRAM-BASED REPORTS


20

HOW FLEXIBLE ARE YOUR EXPENSES?

Scenario Planning Approaches

Highly flexible expenses

Flexible and fixed expenses

Significant fixed expenses

Budget by project

Avoid fixed expenses

Short-term horizon

Adapt to new information

Low financial risk

Mix of short-term project and line-by-line budget scenarios

Annual budget timeline

Develop at least two scenario options

Low-medium financial risk

Requires program planning for all areas considering redesign, contraction, or elimination

Line-by-line expense options

Two year budget timeline

Develop at least two scenario options, including use of any reserves

Medium-high financial risk


21

REVIEW OF ANALYSIS

Liquidity analysis•

Balance sheet strength•

Income risk and reliance•

Trend analysis•

Program financial results•

(RE)ITERATION OF ORGANIZATIONAL GOALS AND PRIORITIES

Board and staff leadership revisit goals that have been laid out in strategic plans, work plans, budget

What is most important to the organization?•

How nimble is the organization?•

STRATEGIC DECISION-MAKING


22

CONSIDER MISSION IMPACT AND FINANCIAL IMPACT

What is the right program mix for the organization?•

Which programs require subsidy? Is there subsidy available?•

What should the organization do more or less of?•


23

UTILIZE IDEA SCREENS

Use a customized numeric scale to complete the rubric below to screen different strategies or approaches. The scorecard that results leads to a tactical plan with well-considered risks and benefits.

Strategy 1 Strategy 2 Strategy 3

Mission Impact

Financial Impact

Need/Demand

Alignment with Skills and Identity

Likely to Succeed

Measurable Impact

TOTAL

Inspired by: David La Piana, The Nonprofi t Strategy Revolution: Real-Time Strategic Planning in a Rapid-Response World, Fieldstone Alliance, 2008.


24

ORGANIZATIONAL COST-BENEFIT ANALYSIS

Family Advocacy Network example:

Strategy 1: Increase participant fees

FAN wants to increase financial literacy workshop fees by 10%•

Costs to the Organization

Benefits to the Organization

Current Year

Mission

Financial

Org Capacity

Future Years

Mission

Financial

Org Capacity


25

UNDERSTAND YOUR FINANCIAL MANAGEMENT CULTURE

What types of languages and attitudes are prevalent when discussing organizational finance?

Scarcity: “cut, cut, cut – we never have sufficient resources”•

Possibility: rethinking, revisioning, innovative and creative•

Inertia: “we could never possibly change that”•

How dynamic is your budget?


26

UNDERSTAND YOUR FINANCIAL MANAGEMENT CULTURE

Professionalization

Are internal controls in place and regarded?•

Is there a quality expectation of financial reports?•

Are reports prepared in a timely manner?•

Roles and responsibilities

Who is involved in strategic conversations?•

Who is involved in financial decisions?•

Executive staff, board members, program staff•

Transparency and communication

What kind of language is used to describe financial position?•

How easily accessible is financial information?•

Risk tolerance

How is prospective income treated in the budget?•

How willing is the organization to take on new projects?•

How willing is the organization to invest internal resources in building•capacity, such as program development and staff training?


27

SCENARIO PLANNING CONSIDERATIONS

How will scenarios differ?

Consider the entire realistic realm of possibilities, particularly in the income•budget

Are income sources variable by percentage or all-or-nothing?

What events would trigger a change in course?

How flexible are your expenses? How could they become more flexible?

SCENARIO PLANNING


28

BE WELL CLINIC INCOME SCENARIO 1


29

BE WELL CLINIC EXPENSE SCENARIO 1


30

BE WELL CLINIC IMPACT SCENARIO 1


31



32



33

BE WELL CLINIC IMPACT SCENARIO 2


34



35



36

BE WELL CLINIC EXPENSE SCENARIOS SUMMARY


37

BE WELL CLINIC SCENARIO PLANNING SUMMARY


38

PURPOSE OF FINANCIAL FORECASTING

Provide an action plan to achieve strategic goals•

Translate strategic plans into financial plans•

Confirm priorities•

Identify capacity needs•

Prepare for organizational changes to support goals•

Create SMART goals to implement financial plan•Specific•Measurable•Attainable•Realistic•Timely•

FINANCIAL FORECASTING


39

FINANCIAL FORECASTING STEPS

Use strategic plan to identify financial requirements•

Prepare simple budget plan for core ongoing activities•

Estimate costs to achieve strategic goals•Costs of new activities that will be ongoing•Costs of new special projects•Costs of added organizational capacity•

Identify need for resources to support new costs•Resources of ongoing revenue to pay expenses•Resources of special project revenue•Resources of time to plan and implement•Resources of skills to plan and implement•

Ask and consider: What is our optimal income mix?•

Honestly assess feasibility of financial needs•

Prioritize and balance•

Implement and monitor•


40


41


42


43

HOW TO USE TODAY’S WORKSHOP

Ensure that key organizational decision-makers have a shared understanding of1.the organization’s financial health, business model, and financial risks.

Revisit important organizational documents such as strategic plans and work2.plans. If necessary, revisit conversations to be certain that there is agreementon key organizational goals and priorities.

Consider what will be necessary to become a more financially dynamic and3.flexible organization by reviewing cost structures. Look forward; think abouthow to properly balance an emphasis on annual budgeting with scenarioplanning and multi-year financial forecasting.

financial planning for sustainable … · financial planning for sustainable nonprofits ... explore...

Documents