Session 2: Financial Planning
Charting the Course Towards Long-term Sustainability
Hilda Polanco, CPA, CCSA®, Founder and CEO,
Gretchen Upholt, MPA, Consultant
October 13, 2016
Reflections on Session 1
2
1
Workshop Topics
• Workshop 1: Telling Your Financial Story (September 14th)
• Workshop 2: Financial Planning (October 13th)
• Workshop 3: Financial Monitoring (November 3rd)
• Workshop 4: Operational Excellence (December 8th)
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As a result of participation, organizations can expect:
• Enhanced ability to communicate your organization’s financial story to
staff, board, funders, and other key stakeholders
• Increased ability to use historical financial information to inform the
organization’s future plans and forecasts in an inclusive, team-based
process
• More effective communication and financial decision-making among
members of the leadership team
• A foundation for building an organization-wide culture of operational
excellence
• Identification of areas with opportunities for improvement and action
steps on how to move forward
4
2
What does excellence in financial management look like?
• Organizations engage in effective financial planning to prioritize the use
of resources
• Leaders closely monitor results to understand how the organization is
doing in relation to plans and to adjust accordingly
• Effective financial operations ensure that plans are being executed
properly and that decisions are based on reliable information
• Governance sees that all of these elements are being carried out
properly and in furtherance of the organization’s mission
6
3
What are some elements of success in p
planning?
g
7
Agenda
Financial Strategy
Multi-Year Planning
The Annual Budget
Funding Your Program Plan
Scenario Planning
The Cash Budget
Evaluating Funding Opportunities
8
4
FINANCIAL STRATEGY
Ensuring Financial Health & Setting the Strategic Direction
(1) Creating annual and long-term financial goals and plans
(2) Establishing mechanisms to monitor financial performance
10
5
(1) Creating annual and long-term financial goals and plans
• Establish operating reserves and policies on their use
• Develop multi-year financial plans
• Understand the full costs of programming
• Incorporate scenario planning
• Plan for capital needs, including both operating cash flow and fixed
asset investments
11
MULTI YEAR PLANNING
MULTI-YEAR
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Strategic Planning
Financial Modeling
Sustainability Analysis
Multi-year Planning
Business Planning
Forecasting
13
Why create multi-year plans?
Facilitates the
integration of
operational and
strategic planning
Provides a forum to
address significant
long-term issues
Increases focus on
long-term financial
sustainability
Creates a space for
planning around
multi-year grants
7
How do strategic and financial planning interact?
Strategy gets at the
set of actions
required to achieve
desired goals
Resource decisions,
decisions
in turn, reality-test
the strategic plan,
and allow for further
refinement
Financial planning
forces the focus on
the “how”– e.g.
relevant operational
decisions
15
For-Profit
Non-Profit
• The
rationale of
how an
organization
creates,
delivers,
and
captures
t
value
• The
rationale of
how an
organization
creates,
delivers,
and funds
it impact
its
i
t
16
8
Business Model Statement
• Complements the mission statement by describing the organization’s key
financial drivers (expenses and revenues)
– Health clinic: We are a community mental health clinic supported by
Medicaid fees and private insurance and supplemented by a variety of
other revenue streams, including government contracts.
– Education reform organization: We provide research and advocacy for
educational reform efforts, supported by a few committed individual and
foundation donors who helped create and share our vision for reform.
– Neighborhood multi-service agency: We serve our neighborhood through a
Head Start program funded by a government contract, and through ESL and
citizenship classes supported by an annual fundraising event and business
sponsorships.
17
Examples adapted from Jeanne Bell, Jan Masaoka and Steve
Zimmerman, Nonprofit Sustainability (Josey Bass, 2010)
What organizational characteristics are
associated with different revenue types?
yp
Contributed (e.g.
individual, foundation,
special events)
• Delivery of programs
and raising of funds
independent and
distinct activities
• Requires robust
f d i i ffunction
fundraising
ti
Earned (e.g. program
fees, sales)
• Delivery of programs
and generation of funds
closely tied
• May require
(contributed) subsidies
Government (e.g. fee-forservice, reimbursement
contracts)
• Revenue tied to delivery
of services, but with a
• Third-party payer
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9
What are the key “drivers” of costs
in yyour organization’s
g
model?
• Personnel
– Total personnel costs (including taxes and benefits) are typically around
70% of a human service nonprofit’s expenses
• Occupancy
– Occupancy costs (rent, utilities, mortgage interest, depreciation, etc.) tend
to be relatively fixed over the medium or even long terms
• Purchased goods and services
– Professional fees, supplies, materials, travel, food, etc.
– Generally smaller dollar amounts but greater flexibility
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What are the critical questions to ask when identifying
resources necessary to achieve goals?
Revenues
Expenses
Capital
Investments
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Tool
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THE ANNUAL BUDGET
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Type
Description
Strategic
Budget
3-5 year plan for revenues and expenses, encompassing an
organization’s
organization
s strategic goals.
Operating
Budget
1-year plan for revenues and expenses that includes the
departments and programs of an organization and may
incorporate plans for accumulation of reserves.
Cash
Budget
6-12 month plan for cash inflows, cash outflows, and the
amount and duration of cash shortages or shortfalls.
Program
Budget
1
1-year
plan
l ffor revenue and
d expenses related
l t d tto a specific
ifi
program, with the goal of covering true cost of delivery.
Grant
Budget
A plan for specific revenue and expenses related to a grant or
contract.
Capital
Budget
A plan for fixed asset 23
outlays within a 1-5 year period.
Budget Development: A Five Step Process
1.
Assemble
a budget
team
2. Create
a budget
calendar
3. Prepare
for the
budget
process
4. Build
the
budget
5. Monitor
the
budget
Watch the webinar here:
http://www.wallacefoundation.org/knowledge-center/Resources-for-FinancialManagement/Pages/A-Five-Step-Guide-to-Budget-Development.aspx
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12
Budget Development: A Five Step Process
1.
Assemble
a budget
team
3. Prepare
for the
budget
process
2. Create
a budget
calendar
4. Build
the
budget
5. Monitor
the
budget
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Step 1:
Assemble the Budget
Development Team
Program &
Department
Managers
Executive
Director
Lead
Finance Staff
Member
Human
Resources
Director
Board
Treasurer,
Finance
Committee
Development
Director
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13
Step 2: Create a Budget Calendar
www.strongnonprofits.org
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Budget Development: A Five Step Process
1.
Assemble
a budget
team
2. Create
a budget
calendar
3. Prepare
for the
budget
process
4. Build
the
budget
5. Monitor
the
budget
• Set Financial Goals
• Gather Data and Build Budget Template
• Forecast Current Year Results
• Conduct Team Kickoff Meeting
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14
Planning should look to the past as well as to the future
The Past
The Future
• Financial position
• Recent trends
• Strengths and
weaknesses
• Programmatic goals
• Financial goals
• Risks and uncertainties
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Where have you been?
• Financial trends:
– Provide insight into the previous year’s results
– Allow an organization to use historical results to inform future
decision-making
• Critical questions:
– How strong is your organization’s Balance Sheet?
– What is your operational story?
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15
Determining Budget Goals
• Set financial goals for the upcoming fiscal year, incorporating the Board’s
perspective:
– Budget for a surplus, deficit, or break-even?
– Recoup past deficits?
– Build reserves?
• Define how budgetary goals continue or reverse past financial trends
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Questions 1 – 3
32
16
Budget Development: A Five Step Process
1.
Assemble
a budget
team
2. Create
a budget
calendar
3. Prepare
for the
budget
process
4. Build
the
budget
5. Monitor
the
budget
• Budget Expenses
• Budget Revenue
• Plan Alternate Scenarios
• Forecast Cash Flow
33
• Secure Board Approval
Budgeting: A Case Study
34
17
What is included in the “full cost” of a p
program?
g
35
www.overheadmyth.com
First Letter: to Donors
Second Letter: to Nonprofits
36
18
The Overhead Myth:
Letter to Nonprofits
Resources to
understand true costs
Video: Real Talk About Real Costs
https://www.youtube.com/v/z_w3v6TxJZQ
19
Federal Funding: New OMB Uniform Guidance
• In effect as of December 2014
• Requires all government funders to reimburse “reasonable” indirect
costs when federal dollars are part of funding stream:
– De minimis indirect cost rate is now 10%
• Clarifies cost allocation rules, allowing more costs to be reimbursable as
direct costs (i.e. admin staff dedicated to a specific program)
Uniform Guidance: Resources from the National Council of Nonprofits:
www.councilofnonprofits.org/omb-uniform-guidance
39
Operating Budget: Key Framework
• Presented by programmatic/functional activity
• Separates direct and shared expenses so that “overhead” can be
calculated separately
40
20
Budget by Program / Function
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These categories should align with
your budget presentation
21
Natural and Functional Expenses
Natural Expenses
Functional Expenses
Expenses classified by the
type of activity for which the
expense was incurred:
• Programs
Expenses classified by the
nature of the expense:
• Salaries
• Rent
• Management and
general
• Utilities
• Supplies
• Fundraising
43
Specific and Shared Expenses
Specific Expenses
Shared Expenses
Expenses that can be specifically
assigned to one or more
program(s) or function(s), based
on time or money spent directly
in each program or function
Expenses that are shared among
some or all programs and
functions. These expenses must
be allocated among functional
areas on the basis of an
appropriate methodology
Salaries for program personnel
Salaries for fiscal staff
Fundraising expenses
Rent & utilities in a common space
Office supplies
Depreciation
44
22
Funders and contracts are often more likely to fund “Tier 1” expenses
than “Tier 2,” and “Tier 2” than “Tier 3”
TIER 1
Specific Program
Expenses
TIER 2
Shared Program
Expenses
E
penses
TIER 3
Management & General
and Fundraising Expenses
(“Overhead”)
How we see our costs
How funders see our costs
Specific Program Expenses
Tier 1
Program
Shared Program
Expenses
Tier 2
Indirect
“Overhead”
Tier 3
46
23
Allocation Methodology
Definition
A method by which costs associated with more than one program or
support area (administrative or fundraising) are distributed across
functions.
Purpose
To allocate expenses in order to determine the true costs of programs and
cost per unit of services
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Allocation of Personnel Expenses
• Personnel expenses (for full time and part time staff) are allocated based
on Staff Level of Effort, can be substantiated by:*
– Timesheets
– Time studies
– Employee Attestation Statement
* Method of substantiation is often dictated by funder
48
24
Allocation of non-personnel costs
Types of Non-personnel
Occupancy
Rent
Utilities
• Cleaning
• Maintenance
•
•
Interest
Insurance
Depreciation
Can be allocated based on
% of salary dollars
Headcount (F.T.E)
Facilities use studies (%)
Square footage
Asset use (for debt to acquire property)
Loan use (for working capital loans)
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Staff Level of Effort: FTE Calculations
50
25
Personnel: Salaries
Tier 1: Specific
Program Expenses
51
Tier 3: Specific M&G
and Fundraising
expenses
Personnel: Salaries + Fringe
52
26
Tiers 1 & 3: Specific Expenses
Tier 1: Specific
Program Expenses
Tier 3: Specific M&G
and Fundraising
Expenses
Tiers 2 & 3: Shared Expenses
Percentages d
P
derived
i d using
i staff
ff llevell off
effort calculation
Tier 2: Shared
Costs Allocated to
Programs
Tier 3: Shared Costs
Allocated to M&G
and Fundraising
27
Tier 1 +2: Specific and Shared Expenses
for Program A
Specific Program
Expense
Total: $154,280
Shared Expenses
Allocated to Program
Total: $23,664
Tier 3: Supporting Services (Overhead)
Specific M&G and
Fundraising Expenses
Shared Expenses Allocated to
M&G and Fundraising
28
Bringing Together Tiers 1, 2, and 3
Tier 3: “Overhead”
Tier 1:Specific
Program Expense
Tier 2: Shared
Costs Allocated to
Programs
57
Advocating for Funding
“Overhead"
Tier 1:Specific
Program Expense
Tier 2: Shared
Costs Allocated to
Programs
Tier 3: Portion of
Supporting Services
Allocated to
Programs
29
Examples
1. Raise unrestricted dollars
2. Indirect cost recovery
3. Develop an earned revenue stream the
covers the full cost of the associated program or more
4 Build an overhead rate into requests for restricted program funding
4.
59
Operating Budget: Key Framework
• Presented by programmatic/functional activity
• Separates direct and shared expenses so that “overhead” can be
calculated separately
• Includes considerations for capital
60
30
Linking the Capital Budget to Operational Planning
• Incorporate elements of capital planning into the annual operating
budget
– Addition to reserves for capital replacement or annual depreciation expense
– Interest payments on mortgages or other long-term debt
• Include the following in your cash flow budget:
– Cash
C h outlays
tl
related
l t d tto capital
it l expenditures
dit
– Principal repayment on long-term debt
61
Program-Based Budget Builder
www.strongnonprofits.org
62
31
Questions 4 – 7
63
Operating Budget: Key Framework
• Presented by programmatic/functional activity
• Separates direct and shared expenses so that “overhead” can be
calculated separately
• Includes considerations for capital
• Reflective of revenue and support for current year operations (including
funds raised in prior years), taking into account probability of receipt
64
32
FUNDING YOUR
PROGRAM PLAN
How do you project revenue and support
at budget
b d
time?
i ?
66
33
Contributed Revenue
Earned / Other Revenue
Individual Donations
Government
Foundation / Corporate
Program Service Fees
Special Events
Endowment Income
In-Kind Donations
Other (interest, unrelated
business income, etc.)
 What are the risks associated with each revenue source?
67
Key Considerations
• Probability of receipt
– Committed / pending / to be raised
• Purpose of funds
• Addition to bottom line (net of new expenses)
68
34
Revenue and Expenses by Program
Surplus/Deficit
By Program
Restricted Revenue Scenario
1. ABC Foundation has a December 31st fiscal year-end. The organization
was awarded a multi-year grant in January 2016 for $120,000 from a
local foundation, to be spent equally over three fiscal years on the
KIDS program.
a.
How much should’ve been included in the FY16 budget?
b.
How much should be included in the FY17 budget?
c.
What happens if ABC nonprofit didn’t spend as much of this grant as it
intended to in FY16?
70
35
Year 1 of the Grant
Year 2 of the Grant
Year 3 of the Grant
Questions 8 – 9
72
36
Operating Budget: Key Framework
• Presented by programmatic/functional activity
• Separates direct and shared expenses so that “overhead” can be
calculated separately
• Includes considerations for capital
• Reflective of revenue and support for current year operations (including
funds raised in prior years), taking into account probability of receipt
• Contemplates scenarios (Plan A, Plan B)
73
SCENARIO PLANNING
37
Purpose of Scenario Budgeting
• Scenario budgeting allows organizations to plan strategies for variables
related to revenues.
• Based on likelihood of funding, can create multiple scenarios:
– Best Case Scenario
– Moderate Case Scenario
– Worst Case Scenario
75
Implementation of Scenario or Contingency Plan
• In times of considerable uncertainty, put in place a benchmark that will
trigger action:
– Example: If $_____ of funding doesn’t come through by December
31, $_____ in specified expense cuts will be made
• Ensure board approval and oversight of:
– Trackingg against
g
the benchmark
– Implementation of contingency plan, if necessary
76
38
CASH BUDGET
6 to 12-month plan for cash disbursements and receipts, month by
p
g both operating
p
g and capital
p
requirements
q
month,, incorporating
• Translates budget items into calendar of cash receipts and
disbursements
• Includes cash outlays that may not be included in the operating
budget (e.g. repayment of debt principal or purchase of fixed
assets)
• Identifies periods of potential cash shortfall or excess
• Should be updated monthly to account for actual results and
revised expectations
39
Our organization experiences cash flow challenges:
Never, 0%
Frequently, 23%
Rarely, 31%
Sometimes,
46%
79
Our cash flow model projects out for the upcoming:
Cash flow not
projected, 15%
Month, 15%
2-6
2
6 month
period, 31%
6+ month
period, 39%
80
40
What to do
What not to do
• Focus on receivables
collections / maximizing
billing for services rendered
• Delay payment of payroll,
payroll taxes, and/or benefits
• Delay payments to vendors
that will impact the quality of
programming
• Liquidate short-term
investments, if available
• Use your Line of Credit
• Rely on personal loans from
staff and Board members, if
possible
• Delay non-critical vendor
payments
• Negotiate with foundations
on timing of payments
81
82
41
Cash Flow Projection Template
www.strongnonprofits.org
Questions 10 - 11
84
42
EVALUATING FUNDING
OPPORTUNITIES
Show of Hands…
Does your organization have an established process to evaluate funding
opportunities prior to applying?
86
43
Fi
Financial
i l
impact to the
organization
Implications
of program
delivery
Contract
management
requirements
Suitability
of funding
opportunity
87
What is the process?
• Designate an “RFP Committee” to evaluate each funding opportunity –
both private and government
• Include representatives from:
– Program
– Finance
– Development
– Senior Management
– Operations
• Implement a process to ensure that the RFP Committee reviews all
relevant funding opportunities
88
44
Question 12
90
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RESOURCES
• Investing for Impact: Indirect Costs are Essential for Success, National
Council of Nonprofits, October 2013.
http://www.govtcontracting.org/sites/default/files/investing-for-impact.pdf
• Getting Your Nonprofit Budget Past “One Day (or Year) at a Time,” Hilda
Polanco, The Dodge Blog, May 2016:
http://blog.grdodge.org/2016/05/03/technical-assistance-getting-your-nonprofitbudget-past-one-day-or-year-at-a-time/#sthash.viu7dSrc.dpbs
• A Graphic Re-visioning of Nonprofit Overhead, Nonprofit Assistance Fund,
August 2016: https://nonprofitsassistancefund.org/blog/2016/08/graphic-revisioning-of-nonprofit-overhead
• Uniform Guidance: Resources from the National Council of Nonprofits,
www.councilofnonprofits.org/omb-uniform-guidance
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• Board Leadership: Developing an Appreciation for Depreciation, Hilda
Polanco, The Dodge Blog, March 2014: http://blog.grdodge.org/2015/03/04/aboard-conversation-developing-an-appreciation-for-depreciation/
• Brexit Highlights Importance of Scenario Planning: The Known and the
Unknown, Dipty Jain, FMA blog, July 2016:
http://fmaonline.net/2016/07/20/brexit-highlights-importance-of-scenarioplanning-the-known-and-the-unknown/
Program-Based Budget Builder
http://www.wallacefoundation.org/knowledge-center/Resources-forhttp://www.wallacefoundation.org/knowledge
center/Resources for
Financial-Management/Pages/Program-Based-Budget-Template.aspx
Funding Opportunity Assessment Tool
http://www.wallacefoundation.org/knowledge-center/Resources-forFinancial-Management/Pages/Funding-Opportunity-Assessment-Tool.aspx
Cash Flow Projections Template
http://www.wallacefoundation.org/knowledge-center/Resources-forFinancial-Management/Pages/Cash-Flow-Projections-Template.aspx
Fiscal Management Activities Calendar
http://www.wallacefoundation.org/knowledge-center/Resources-for-FinancialManagement/Pages/Fiscal-Management-Activities-Calendar.aspx
94
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Online Tutorials for StrongNonprofits.org
FMA offers complimentary orientation one-hour webinars that feature an
overview of the website and drill down on several of its key resources
Upcoming webinar dates:
• November 29, 2016 at 2:00pm ET
• January 24, 2017 at 2:00pm ET
To register, or see upcoming webinar dates:
http://fmaonline.net/strongnonprofits
For a 15-minute, on-demand webinar tour of the site:
http://fmaonline.net/SNPonDemand
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QUESTIONS?
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Session 3: Financial Monitoring
• Date: November 3rd
• Time: 9am – 3pm
• Who Should Attend: Executive Director/CEO, Lead Finance Staff, Program
Director(s), Development Director
• Remember to bring: Most recent package of financial reports submitted
to the board
97
http://fmaonline.net/hartford-foundation-managementtraining-program/
98
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Please complete and return the evaluation in your packet
How did we do?
99
• Established in 1999 to serve not-for-profit organizations around the country
• Provides customized financial management, accounting, software, organizational
development human resources,
development,
resources and other consulting services
• Works directly with organizations or through funder-supported management and
technical assistance programs
FMA's mission is to empower not-for-profit organizations with the knowledge
and skills to successfully serve their constituents and fulfill their missions
Trainer Name and Email
New York | Chicago | Oakland | Los Angeles
@FMA4Nonprofits
/FiscalManagementAssociates
www.fmaonline.net
linkedin.com/company/fiscal-management-
associates-llc
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