We went through tough times. The pandemic was rough on nonprofits, however there will always be unexpected things that arise—pandemic or otherwise. Nonprofits that proactively anticipated change with proper financial planning better weather uncertain times and unexpected fiscal disruptions.
Forward-facing challenges that affect budgets, capacity, cash flow, and planning exist, and communicating those challenges to your board, and external stakeholders in the light of uncertainty can be difficult. However, your nonprofit can realize better fiscal results by embracing flexibility from a strategic and financial management standpoint.
Gone are the days when your nonprofit set its budget and updated it the following year. Your accounting team should reevaluate and update your organization’s budget to properly reflect the year’s performance and the emergence of new income sources like unusual funding or multi-year grants throughout the fiscal year.
While these funds can be disruptive to budgets at first, properly documenting and communicating the impact the funding will have can help your nonprofit generate greater fiscal returns.
Managing Unusual Funding and Multi-Year Grants
Unusual funding takes many forms. From large, one-time donations/gifts to endowments, capital campaigns, membership assessments, milestone anniversary events, and other similar donations benefit nonprofits because they provide increased cash flow without the usual procedures of the grant process.
Unusual funding offers immediate benefits but can become a challenge in the years following the receipt of these funds because large or unusual funding rarely lines up with a singular fiscal year. Even a six-month grant can materially impact multiple fiscal years of budgets.
To effectively manage unusual funding and multi-year grants, embrace a two-pronged approach. Start by preparing financial schedules that show the anticipated annual usage of multi-year grants for the life of the grant or the expected usage period for the unusual funding. Then, communicate in a multi-year format to move attention away from the impact on any single year.
When accepting these funding sources, your nonprofit will want to rely on a usage authorization period and include the grant or unusual funding in all planning and related communications. For example, when it comes to multi-year grants, you’ll want to document the life of the grant in your budget and align your intended spending annually, starting with the fiscal year your nonprofit receives the funding.
Accounting for unusual funding isn’t the only way your nonprofit can fight uncertainty. Your accounting team also needs to actively document capital line items in its budget planning.
Creating Capital Budgets
Annual operating budgets are focused on the short-term, often to the detriment of the long-term when it comes to sustainability, capacity, and cash flow planning. Finance teams often build operating budgets without incorporating expanding or changing future capital infrastructure. Your nonprofit needs to create and integrate a capital budget to account for infrastructure needs.
Capital budgets complement your nonprofit’s operating budgets because they account for current physical capital and future planning. If your nonprofit isn’t using a capital budget, managing long-term cash flow needs becomes very difficult.
For example, consider your organization’s current capital assets. If you have assets that are still in service past their useful life, there’s danger or immediate operational disruption if one of the assets fails. Your organization needs to replace capital assets before they become obsolete, hard to maintain, or inoperable. Capital budgets allow your organization to anticipate when it will have to replace aging physical assets.
Capital budgets also allow your nonprofit to consider capacity by addressing future issues resulting from growth, new programs/activities, automation, and modernization. These budgets allow your nonprofit to plan when cash will be needed for future capital asset acquisitions and replacements, improving cash flow and financial health.
Weathering uncertainty is difficult for any nonprofit leadership team, but acting today and properly communicating your nonprofit’s fiscal and capital asset positions demonstrates that your organization is a strong steward of funds and a future-thinking organization.
Learn more about forward-thinking nonprofit budget planning in our upcoming webinar with accounting experts Michael Gellman, CPA, CGMA, and Paul Preziotti, CPA. Register for Smart, Forward-Thinking Nonprofit Budget Planning.