Financial planning is a process that allows you to clearly define your goals and preserve the value of your organization. Hence, such planning must be effectively carried out even before the funds are available.
- Effective financial planning is critical to accomplishing an organization’s long-term financial goals.
- Organizations should be able to forecast cash flow on a monthly, quarterly, and annual basis.
What are the major components of good financial planning for nonprofits?
Good financial planning helps to ensure that an organization is making informed decisions. These decisions can be in the area of developing project initiatives, purchases, spending control, and overall operations for the coming year. In this article, we will outline some of the critical components of nonprofit financial planning.
1. Cash flow projection
Organizations should be able to forecast cash flow on a monthly, quarterly, and annual basis. Likewise, projecting cash flow for the entire year allows your nonprofit to stay ahead of any financial difficulties or obstacles. In addition, it provides a great way to identify a cash flow problem before it harms your organization.
Essentially, a cash flow prediction shows how much money is likely to be left over at the end of each month. This allows your nonprofit to prepare for prospective expansion or other projects. It also supports your budget by helping your organization spend less than one month to cover the projected cash needs of another month.
2. Operations plan
A complete overview of your operational demands allows you to manage your organization efficiently. Also, an operations plan provides a good understanding of what roles are required to ensure the smooth operation of your organization. In addition, it can help determine how much output or work each employee will carry out. This ensures that you make informed decisions for your nonprofit growth and efficiency.
By and large, it is critical to keep expenses, such as wages and daily operational expenditures under strict control in relation to growth. Also, an operations plan can help you decide whether there is room to optimize your operations. This could be through automation, new technology, or tools.
3. Contingency plan
A contingency plan is a proactive method for managing risks that could jeopardize the success of your operation. It refers to the written methods and activities you put in place to deal with unforeseen occurrences or circumstances that could derail your project’s timeline, finances, or quality objectives.
Essentially, Contingency plans are not intended to be reactive solutions. They are rather preventive measures created during the project’s planning phase. Hence, these plans should identify prospective problems, assess their likelihood of occurrence, and determine the severity level if they do arise. Afterward, the organization can identify appropriate actions. This could be alternative courses of action or risk transfer mechanisms such as insurance, or partnerships.
When things go wrong, having a well-defined contingency plan in place will alleviate stress for both nonprofit leaders and the team as well.
4. Growth rates
Growth rates are significant in financial planning because they reveal the performance of an organization. Also, they can be used to compare different periods or countries/regions/organizations.
Growth rates are defined as the percentage change in a variable over a certain period. The annual growth rate is the most common growth rate, which is simply the percentage change in a variable over a year. Growth rates can be estimated for any length of time, from one day to several years. Nonprofits can use this process to estimate funding performance over a specific period to show the level of growth.
To sum it all up, effective financial planning is critical to accomplishing an organization’s long-term financial goals. Likewise, annual financial plans should be developed by nonprofit leaders to ensure that they have a clear and accurate image of their organization’s finances and a realistic outlook for future growth or expansion.
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