How to Project Future Finances With Nonprofit Bookkeeping

April 24, 2024 / Comments Off on How to Project Future Finances With Nonprofit Bookkeeping

Blog Featured

With nonprofits seeing a recent decline in revenue across the board, it’s more important than ever to plan ahead financially. Insights into your finances are crucial for determining the future steps you’ll take to continue funding your mission. This goes beyond simply deciding if text fundraising is an effective strategy or how your donation form should be formatted—you must project future finances to determine how your organization will operate and allocate its funding.

Fortunately, if your nonprofit keeps thorough records to file necessary tax forms, you’ve already got access to a key financial planning tool: bookkeeping data. In this guide, we’ll explore how your nonprofit can use its books to project future finances and create an actionable plan for the future. 

Track your revenue streams

To kickstart your financial forecasting, first observe your various revenue streams from the past few years. This will help you estimate future resources, determine how you’ll allocate those resources, and create a plan for growing them. 

Evaluate each revenue stream, including any trends surrounding each source. For example, nonprofit revenue typically comes from:

  • Donor contributions: Use fundraising and donor data to understand how much, how often, and why supporters give. Evaluating individual gifts can reveal key insights about donor behavior that help you predict future giving amounts and patterns. For instance, if most donors give their largest gifts in December, you’ll know to focus your fundraising efforts on the year-end giving season.
  • Corporate sponsorships: Track the revenue you collect from corporate sponsorships and analyze any resulting trends, such as fluctuations in sponsorship levels or engagement. This information helps you predict future sponsor involvement and contributions.
  • In-kind donations: Evaluate the fair market values (FMVs) of in-kind donations received in previous years. Determining the value of items donated and how they were used can help your nonprofit identify ways to adjust its fund allocation properly in the future. For example, if an animal shelter consistently receives more than enough donations of pet food to feed the animals in its care, the organization may allocate less funding to this need in the future.

Once you’ve identified each revenue stream and observed any relevant patterns, you’ll be equipped to set reasonable revenue goals for the future. For example, if major gifts have recently served as a primary source of revenue for your nonprofit, estimate how much you’ll likely raise through major giving next year. Then, use donor behavior data to create a plan for exceeding that estimate. 

Identify expense trends

Similarly to how you estimate future revenue using income data, you can also anticipate changes in future expenses by observing past trends. Identify patterns in common expenses using your bookkeeping data from previous years, including:

  • Program costs: Evaluate any fluctuations in the cost of delivering services or implementing your programs over the past few years. Compare these patterns with industry trends to make predictions about future program costs. For example, what factors influence an increase or decrease in demand for your nonprofit’s services, and what can you expect in terms of demand for the future?
  • Personnel costs: Note any patterns in compensation, benefits, and payroll taxes. For example, your nonprofit may experience an increase in personnel costs due to adjusted staffing levels. Apply this to future predictions—will your staff team need to grow or shrink in future years? 
  • Overhead: Consider the various indirect costs associated with running your nonprofit, such as the cost of your office equipment and training for staff members. Compare these costs to your future operational plans to estimate potential increases or decreases. For example, if you’re shifting to a fully remote workflow, you may anticipate spending more on overhead to provide office desks and chairs for employees’ at-home setups. 

Keep in mind that some expenses are impossible to predict, such as roof repair after a tree falls on your nonprofit’s facility during a storm. However, Double the Donation’s operating reserves guide notes that even unpredictable expenses can be prepared for by developing a savings fund that can cover at least three to six months of your nonprofit’s expenses.

Analyze budget variances

In addition to observing your nonprofit’s financial performance, consider your past goals. Compare previous goals with what was accomplished to reveal any potential variances and understand the reasons behind them. Impactful variances may be found in:

  • Fundraising expenses and revenue, including the budgeted vs. actual expenses for fundraising activities and the fundraising goal vs. revenue generated.
  • Professional services, such as the planned vs. actual services rendered or scope of the project when seeking fundraising consultation, professional nonprofit bookkeeping, or expert grant management. 
  • Administrative needs, or the budgeted and actual resources required for operational efficiency.

By understanding what drives these variances, your nonprofit can improve its budget accuracy and mitigate risks in the future. For example, unfavorable revenue variances in past years may indicate declining donor retention. Noticing this trend equips your nonprofit with the context needed to proactively address retention by focusing on stronger connections with supporters.

Observe key ratios and metrics

Foundation Group’s bookkeeping guide emphasizes that financial statements provide insights into your nonprofit’s financial health, allowing you to adjust your approach and plan your next moves. This is because they provide thorough overviews of your organization’s activities to give you a better understanding of your financial performance. 

Another key way to track your financial health (and make predictions for the future) is by calculating key ratios and metrics based on your bookkeeping data. Key ratios to track include:

  • Liquidity: This is calculated as cash on hand divided by average monthly expenses, which indicates your nonprofit’s capacity to cover short-term financial needs by converting assets to cash.
  • Burn rate: This measures your nonprofit’s monthly negative cash flows by subtracting your operating expenses from your revenue.
  • Program efficiency: This divides total expenses by a specific program’s total expenses to determine how your program cost compares to your overall budget.

Equipped with these ratios, your nonprofit can determine its ability to meet financial obligations and continue funding its programs in the long term. 

Remember to note any special circumstances surrounding your nonprofit’s revenue and expenses when revisiting bookkeeping data from previous years. For example, an influx of restricted funds may force your organization to allocate its resources to specific needs and alter the way you budget.

Projecting future finances is just one of the many valuable purposes of effective bookkeeping, which is why your nonprofit must diligently keep accurate and thorough financial records. Research bookkeeping best practices, invest in software or professional services, and get your books in order today!