A Guide to Strong Nonprofit Financial Leadership- Avoiding Fiscal Uncertainty
In last month’s conversation on financial planning we looked at using the annual budget; this month our financial planning topic is avoiding financial uncertainty. We have had clients that have come eerily close to that fiscal cliff. This uncertainty happens when organizations do not have a plan for the loss of a major funder or an unexpected large expense. Where should you begin to develop your plan?
First, develop an operating reserve. I have seen recommendations for three months of operating expenses, which is a great starting place. If you have a tight cash flow situation, tackling this is difficult but not impossible. We recommend creating realistic cash flow projections for the year. Based on that cash flow projection, set a goal every month to transfer a specific amount to a reserve account. Be diligent! Make that transfer monthly.
Next, create a multi-year budget. Engage your board in reviewing the multi-year budget and help them understand what fundraising goals must be met to avoid financial uncertainty. You can also create a multi-year budget that projects expenses at 90% of the revenue, allowing you to transfer that 10% to reserve.
However you decide is the best approach in your organization to avoid the financial cliff, make a plan and execute.