Into the Future: Forecasting for Your Nonprofit
Knowing where your revenue stands or is likely to stand can be a source of great comfort in uncertain times. Being able to make fact-based predictions that outline your needs, strengths, and areas that might require more work and resources is crucial in nonprofit success. For nonprofits that lack crystal balls--all of them--there is another way! With the help of a nonprofit accountant, you too can expertly predict the probability of your own revenue.
Establish a ranking
You undoubtedly know your own funding sources well, but now it is time to rank them. Find some sort of system that assigns them a metric of dependability. Numbers or letters are great for this. Assign a one for revenue that is most dependable, a two to revenue that is fairly dependable, etc.
Pick a method
The discount method asks you to multiple the dollar amount you expect to receive, from a grant for example, by the probability percentage. Then, you add up those numbers, giving you a total. The discount method is a great choice for nonprofits that receive money from a great variety of sources. This model relies on you keeping up with calculations as funding is solidified. Your accountant can help you update amounts and percentages as necessary--if you receive a grant for $20,000 that you predicted at 50%, for example, you’d want to update your originally $10,000 number to $20,000.
In this method, you take the sum of the full amount of all financial awards over a specific probability. You’d guess that, of all the things you applied for, you’d have a success rate of 70% (or whatever you think is reasonable). Ideally, you won’t count anything that doesn’t have a 50% chance of success. Be realistic, but generous if you’ve got a history of success.
Both methods offer valuable insight into your financial state, providing reliable information to help you plan your organization’s future. Your nonprofit accountant should be able to recommend a method for you, and will likely have tools that help you complete and administer this process. You’ll probably want to experiment with both methods to arrive at the one best suited for you and, while they will differ slightly, you might be surprised to see how similar the amounts are.
While flexibility is often key for nonprofits, your budget should remain as static as possible--which is doable if you put the work in at the beginning of the year. Nonprofits with accurate and detailed budgets are more likely to withstand economic hardships, so a little bit of work now will go a long way later.
By working with your accounting department or specialized nonprofit accountant, you can set your organization up for a great year, no matter the financial climate.