Welcome to Part 3 of our three-part series on nonprofit budgeting basics.

In Part 1, we discussed general budgeting basics, including the most common approaches or types of budgets for nonprofit organizations and how to set financial goals. Part 2 continued the discussion of nonprofit budget types and explored several specific types of budgets and when to use them.

Part 3 continues this discussion of best practices, including what-if scenarios, an excellent way to think through various aspects of the budgeting process. Let's dive right into budget forecasting and its impacts on the budgeting process.

Best Practices for Budget Forecasting

Budget forecasting involves predicting future revenues, expenses, and financial outcomes based on historical data, current trends, and anticipated changes. A sound approach to forecasting helps establish realistic financial goals and builds a roadmap to achieve them. It can help with resource allocation and prioritizing funds for various programs, services, and projects.

By using budget forecasting best practices, you can also identify potential risks and uncertainties and develop strategies to mitigate them. Forecasting is an essential tool to maintain financial health and achieve long-term success.

Make Forecasting a Collaborate Endeavor
Budget forecasting shouldn’t be the purview of a single person or department. It should be approached collaboratively. Accounting and finance can take the lead but should work directly with program managers and key stakeholders to ensure that the process includes all potential revenues, expenses, and risks.

Collaboration is more than just getting input. It’s also an excellent opportunity for accounting to help program managers think through their strategic plans and prioritize projects. The forecasting process becomes more of a strategic planning and budgeting process rather than simply a financial exercise and encourages thoughtful discussion and analysis of projects, priorities, and finances.

Use KPIs for Effective Planning
Key Performance Indicators (KPIs) are measurable values organizations assign to specific goals. These can be measured to determine progress toward goals. Organizations use KPIs at multiple levels to evaluate their success in reaching targets. High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, or support.

Assigning KPIs is part of budget forecasting best practices. These can be used to measure the performance of projects, events, and program areas. KPIs create a system of accountability by providing clear metrics for employees and departments to achieve. This helps ensure that everyone is working towards the same financial objectives.

Accounting Software Dashboards Helpful for Budget Forecasting
Dashboards in accounting software are valuable tools for budget forecasting. They visually represent financial data, making it easier to understand and analyze. If your nonprofit accounting software includes dashboards, you can leverage them to:

• View real-time insights into financial performance, allowing businesses to adjust their budgets and forecasts promptly.
• Integrate various financial data sources, providing a comprehensive view of the organization’s financial status.
• Automate data collection and reporting, reducing the risk of human error and saving time for financial teams.
• Perform scenario analysis, helping businesses plan for different financial outcomes and make informed decisions. (See the “What If” analysis section below for more details on this best practice.)

Leverage Nonprofit Accounting Software
One critical best practice for all organizations is using specialized nonprofit accounting software. This is software purpose-built for nonprofit organizations. Typical small business accounting software isn’t designed to handle the complex budgeting and reporting needs of a nonprofit. Using specific nonprofit accounting software will save you a great deal of time and effort and make the entire budget forecasting cycle easier and more efficient.

Nonprofit accounting software simplifies budget forecasting by addressing the unique needs of nonprofit organizations. It handles fund accounting, ensuring that each fund is tracked separately and used according to donor restrictions.

This software can also manage grants by tracking applications, awards, and expenditures, ensuring compliance with grant requirements and accurate forecasting of future grant income.

Nonprofit accounting software enhances transparency and accountability by providing detailed financial reports, which are crucial for maintaining donor trust and meeting regulatory requirements. Lastly, it automates data entry and integrates with other financial systems, reducing the risk of errors and saving time. This allows nonprofits to focus on strategic planning and forecasting.

Schedule Regular Reviews
Another budget forecasting best practice is to follow up the initial forecasting period with periodic reviews. During these reviews, accounting and finance should meet with program directors to compare the budget to actual cash flow and expenses. Any differences between actual and forecasting should be discussed, and the budget adjusted accordingly.

Factors Impacting Budget Forecasts

So far, we’ve discussed budget forecasting in terms of expenses and revenues within an organization. However, external factors influence budget forecasts, too, and should be considered. These factors include:

• Unexpected changes for better or worse with potential funding sources: This often impacts grant-based funding, but it can impact any area of an organization. For example, if an organization plans a fundraising event and it is canceled due to inclement weather, this will impact the event budget. Some expenses are already entered for the event, such as ticket sales or nonrefundable deposits for the venue, and the revenues will not occur. Every potential lost funding source throughout the year should be examined, and the budget should be adjusted during the periodic revenues.
  
  
• Demographic changes: If your nonprofit focuses on a specific demographic, such as the elderly, any demographic shifts should be considered as part of the budgeting process. A large influx of retirees into your community may mean that the need for services increases over time for a nonprofit devoted to caring for the aging. Similar demographic shifts, such as birth patterns, may impact nonprofits serving schools, children, or parents.
  
  
• Economic trends: Inflation has taken a bite out of everyone’s pocketbooks, and this impacts nonprofits in several areas. Not only has the cost of doing business increased in every area, from rent to office supplies, but it may also negatively impact donations as donors tighten their purse strings in response.
  
  
• Taxation changes: Any changes at the federal level to tax deductions and personal income taxes should be considered, too, as this may impact donor funds.

What-If Scenario Planning Helps the Budgeting Process

"What if" scenario planning and budgeting for nonprofits involves creating different financial plans based on potential future events. This helps organizations prepare for uncertainties and make informed decisions. Imagining a scenario and the associated revenues and expenses can help with budgeting, contingency, and strategic planning.

Scenario planning identifies potential uncertainties, such as changes in funding or economic conditions, and develops different scenarios to see how these factors might impact their operations.

First, identify critical factors such as donor contributions or operational costs. Then create multiple scenarios based on different assumptions, like an increase or decrease in donations. Next, assess how each scenario might affect their budget and programs. Finally, develop strategies for each scenario, including cost-cutting measures or diversifying funding sources.

Scenario planning benefits include being prepared for potential challenges, having the flexibility to adjust plans quickly as conditions change, and making strategic decisions based on data.

Incorporating scenario planning into budgeting means creating flexible budgets that can adapt to different scenarios. Start with a baseline budget and then develop alternative budgets for each scenario. Regularly review financial performance and adjust budgets as needed.

AccuFund Nonprofit Accounting Software for Budget Forecasting and What-If Scenarios

Nonprofit accounting software aids "what if" scenario planning by providing real-time financial data, scenario modeling features, customizable reports, and advanced budgeting tools. It helps nonprofits create flexible budgets, identify potential risks, and develop mitigation strategies.

KPIs can be tracked through nonprofit accounting software, and dashboards used to track progress towards goals, conduct periodic checks of budgets versus actual, and adjust the forecasting as needed.

The software's efficiency and automation streamline financial management, allowing organizations to focus on strategic planning and make informed decisions. This ensures your organization is better prepared for uncertainties and can maintain financial stability.

By using "what if" scenario planning, you can better navigate uncertainties and stay focused on your organization’s mission.

Learn more about AccuFund nonprofit accounting software and how it can help your organization improve efficiency and budgeting.

Related Materials

Nonprofit Budgeting Basics - Part One
Nonprofit Budgeting Basics - Part Two
Nonprofit Storytelling White Paper
AccuFund Nonprofit Accounting Software
AccuFund Budget Development