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Managing Financial Fluctuations in Your Nonprofit

best practices board finances foundation funding reporting Feb 08, 2024

Managing Financial Fluctuations in Your Nonprofit 

     How do you forecast and plan for financial fluctuations and emergencies? There's nothing worse than realizing the bank account is not adequate for the payments due this week! Today, I want to share with you how managing a nonprofit by the bank balance is risky business and misses the big picture. 

    So, how do you manage your finances in a way that plans for, identifies, and responds to fluctuations? Well, the key is to use your budget. I recently covered this strategy in this article, but I want to dive a little deeper today.

Allocate Your Budget By Month

     Start by allocating your budget by month. You see, your income (the money coming in) and your expenses (the money going out) are not linear. Income and expenses do not look like straight, flat lines throughout the course of a year. My personal income and expenses are certainly not linear. Your nonprofit finances aren’t either. In fact, nonprofits tend to see much more dramatic highs and lows throughout the year.

     Instead of being surprised by dramatic fluctuations, plan for a budget that actually anticipates and reflects them. Using your accounting software, allocate your budget by month, spreading it out where you know your income and expenses will actually occur. Of course, you will have accounts with unknown timing where you can’t clearly predict the spending. In this case, you’ll allocate these evenly each month, until you can predict spending patterns. But allocate your budget for the accounts with spending patterns that you do know. (i.e. “This happens in January” or “This only happens in March” or “This doesn't happen until December.”) 

Use Your Budget As Your Cash Flow Planning Tool

     Now, your budget becomes your cash flow planning tool! This gives you the ability to look at that budget report by month for the whole year to see when the natural deficit times are so you know exactly when to expect a shortfall. For example, I know of a nonprofit who operates at a loss from January to May, knowing that their big fundraiser in June will catch them up for the year. I have another nonprofit client who is grant funded and receives their full funding amount in one month of the year. Naturally, they will see some months where they're having shortfalls, and then in the month that the resources come in, they recover. 

     You can also translate all of these trends into a cash flow plan to know when you need to dip into your cash balances and when you can position them for protected growth. (See last week’s post on how to grow your cats reserve in a way that also protects it) 

Use Your Budget to Actual Report

     The next step is to report on it. Whether you’re a board member, part of the management team, the CEO, or the treasurer, you need to actually see how your budget to actual report is trending. Why?Sometimes, when you fail to anticipate and plan for these negative patterns, it can feel hopeless and you can become very disappointed. This can cause you to unnecessarily tighten the budget up because you're discouraged and afraid. On the other hand, if you fail to recognize when you are in the season of abundance, you might not be looking ahead to see the season of scarcity coming, leading you to overspend in this time. 

     You’ll need a budget to actual report for both the current month and for your fiscal year to date. The bottom line on that report measures how you're doing according to the plan. So, for example, in a lean month, you may already expect to have a bottom line number that reflects a deficit of $100,000. By allocating the budget and using it to plan cash flow,  we know that the resources are slow coming in right now and faster going out. So we should be operating with a deficit. That’s the “budget” number on the report. Next, you’ll want to look at your report and compare it to the “actual” number. Maybe your “actual” is -$150,000. Well, in this case, we’d be able to recognize that we're moving too far ahead. We’d need to make some spending corrections and we’d need to check in on that income to see if there’s some other reason we’re missing our budget target.

Adjust Your Budget When Needed

     Anytime you bump into this budget to actual discrepancy, you need to take a deeper look so that you can make those adjustments to your budget. The key is to remain agile and equipped to adjust as you go. Finally, I want to remind you that sometimes you truly do need to adjust your budget. There's no sense in going through the whole year with a static budget if you've already recognized that things are worse (or better) than you thought. There's absolutely no reason to operate on a budget you set six, eight, or even nine months ago. Make those budget adjustments. Go through the process. Go to your board and get the budget approval. Explain the “why” and then use those new budget numbers to reflect reality based on what you know now. 

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