Budgets are Lousy Financial Plans

A large percentage of nonprofits view their strategic plan as an essential part of managing the organization. The process of developing a strategic plan clarifies the purpose of the organization in a mission statement, and gets the staff and board on the same page by setting goals and priorities. The most commonly used tool for financial planning, on the other hand, is the annual budget. For many nonprofits, the financial goal represented by the budget boils down to this: “we hope we can raise enough money to pay for programs and overhead this year. We’ll work really hard to get this done.”Unfortunately, that’s a lousy way to plan.

What nonprofits need is the financial equivalent of the strategic plan that sets goals for programs and organizational development. This kind of financial plan is not for one year. It includes big goals, a clear path to accomplish goals, resource and capacity needs, and benchmarks for monitoring progress. Just as the process of strategic planning brings everyone together to set goals and sort through options and priorities, developing a strategic financial plan reveals the strengths and weakness of the current financial structure and sets goals that are more than annual revenue targets. What’s the right cost structure for delivering programs with measurable impact: paid staff, volunteer, intern, national service corps? These decisions will determine program, management, and financial structure. This idea is illustrated well in the article about Nonprofit Business Model Statements published on Blue Avocado last year.

Most nonprofit strategic plans that I’ve read give limited attention to the financial structure that will be needed to be successful. Some include some projections in an appendix, but most include a short set of financial goals such as “increase fundraising”, or “implement new individual donor program.” Our resource article Transforming Nonprofit Business Models describes the four components of business models: mix of revenue sources, cost of effective programs, infrastructure, and capital structure. A strategic financial plan needs to address each inter-related element of the model both now and what will be needed for the organization to achieve its goals over the next three to five years.

The steps followed in developing a strategic plan include agreeing on the vision and mission, gathering internal and external information to assess community needs and organizational capacity, establishing three to five year goals, and describing more specific objectives for implementing the plan. Strategic financial planning requires similar steps:

• Agree on a vision for financial sustainability
• Analyze financial history and trends
• Conduct a SWOT assessment of the business model
• Identify the current business model
• Evaluate the financial requirements to fully implement the strategic plan
• Assess the external community and market drivers and internal capacity for changing the financial structure
• Describe the business model that will be needed in five years
• Create a three to five year implementation plan

Strategic planning needs the commitment and participation of many skills and perspectives from inside and outside the organization. In the same way, strategic financial planning requires technical expertise for analysis and projections, strategic thinking about structure and alternatives, and creativity to weave together vision, mission and business models.

I’ll be presenting a more thorough session on the need for financial strategy and strategic financial plans at United Front 2011 on Thursday morning. This is going to be a great conference with lots of bold topics about strategy, leadership, and impact. Join us if you can!