A Guide to Financial Forecasting for Nonprofits

How many times have you scaled back an ambitious project or passed on an opportunity due to unexpected budget constraints? In the resource-constrained nonprofit sector, these scenarios are all too common. 

Unpredictable funding, shifting audience preferences and economic fluctuations make it complicated to plan ahead. Traditional budgeting methods often fall short because they fail to fully capture the relationship between mission-driven decisions, strategic plans and financial outcomes. 

Sharpening your financial forecasting can make an enormous difference. This is about more than simply predicting numbers—it’s about understanding the financial implications of your choices, anticipating challenges and identifying opportunities for growth and innovation. 

This guide will help you transform your approach to financial forecasting, so you can make more informed decisions, communicate effectively with stakeholders and ultimately strengthen your organization’s impact and sustainability.

The Importance of Financial Forecasting for Nonprofits

Financial forecasting helps nonprofits manage the unique mix of resources these organizations rely on—from ticket sales and memberships to grants, donations and in-kind contributions. With the right approach to financial forecasting, organizations can balance projects with maintaining fiscal responsibility.

Detailed forecasts allow you to anticipate seasonal fluctuations in revenues and expenses, predict the financial impact of new programs and allocate resources effectively. This is particularly valuable for organizations with cyclical programming, like theaters with seasonal productions or museums with rotating exhibitions. 

Forecasting aligns the strategic vision of your organization with its financial reality. It balances the desire for creative innovation with the need for financial stability, ensuring that investments in your community are supported by sound financial planning. Additionally, a robust forecast aids in risk management by allowing leaders to anticipate emerging challenges and to monitor spending and development to address fundraising shortfalls. 

A robust financial forecast can strengthen grant applications, foundation requests and donor pitches, demonstrating how their support will contribute to your organization’s long-term sustainability and impact. By implementing effective forecasting practices, you’re creating a roadmap that allows your organization to pursue its cultural mission while navigating the complex financial landscape of the nonprofit world. Showing the financial impact of new programs and initiatives helps nonprofits understand which of their activities are most impactful and successful and helps leaders develop a case for continuing these programs. 

A 5 Step Approach to Financial Forecasting

Financial forecasting in nonprofit organizations isn’t a one-size-fits-all process. It requires a tailored approach that considers your organization’s unique characteristics, challenges, and goals. Below, we’ll walk you through developing a comprehensive financial forecast that goes beyond simple budgeting in just five steps.

Step 1: Gather and Analyze Historical Data

The foundation of any good forecast is solid historical data. This involves more than just collecting numbers. You’ll need to take a deep dive into your organization’s financial history to uncover patterns and trends. 

Start by gathering the information about the past 3-5 years, such as:

• Revenue broken down by source (e.g., grants, donations, ticket sales, memberships)
• Identify contributions with and without restrictions
• Categorized expenses (e.g., operations, exhibitions, programs, marketing, facilities)
• Seasonal trends in revenue and expenses
• In-kind donations and their valuation
• Volunteer hours and their equivalent monetary value
• Other factors unique to your organization. For instance, a performing arts organization may consider historic attendance figures 

Once you have this data, analyze it carefully to find patterns, trends and irregularities. For example, if you run a modern art museum, you might notice that attendance spikes by 40% during months when you host interactive installations, while gift shop sales remain consistent year-round. 

This insight could inform both your programming decisions and your revenue projections for the coming year. Remember, the goal here isn’t just to collect data, but to understand the story it tells about your organization’s financial performance over time.

Step 2: Identify and Quantify Key Drivers

After analyzing your historical data, the next step is to identify the key drivers that have the most significant impact on your financial performance. These drivers will vary depending on your specific organization, but they often include factors like:

• Number and type of programs or events
• Membership retention and expected ticket sales
• Grant application success rates
• Donor history, retention rate and future pledges
• Future capital expenditures identified in strategic 5 to 10 year plan
• Economic indicators affecting discretionary spending in your area
• Seasonal variations in revenue, expenses, program activities and more

The goal is to move beyond general observations to specific, quantifiable impacts. This process involves not just recognizing these drivers but understanding how they directly affect your organization’s finances. 

To illustrate this process, let’s consider an example: 

Imagine you’re the finance director of a children’s science museum. Through careful analysis of your historical data, you’ve identified that every new interactive exhibit you install increases overall attendance by 20% for the first three months. This is a key driver for your organization. By quantifying this driver, you can more accurately project attendance—and by extension, ticket revenue—when planning new exhibits. 

This example demonstrates how identifying and quantifying a key driver can directly inform your financial forecasting and decision-making processes. It allows you to predict the financial impact of specific actions or investments, in this case, the installation of new exhibits.  

Support Your Forecasting with the Right Tools

After gathering historical data and identifying key drivers, it’s important to enhance your forecasting with the right technology. While spreadsheets can be useful, specialized nonprofit financial management software offers significant advantages. 

• Integration: Connects with your accounting system for real-time data updates.
• Scenario modeling: Allows easy creation and comparison of multiple financial scenarios.
• Visual dashboards: Simplifies data interpretation for stakeholders.
• Customizable reports: Tailors reports for different audiences enhancing communication.

An experienced nonprofit accounting advisor can help determine which tools are the best fit for your organization, help you deploy them and potentially provide the training and support you need to bring your internal team up to speed. 

This type of software allows organizations to incorporate real-time data from donations, improving forecast accuracy and transparency. Additionally, these tools can help identify wasteful expenses by comparing spending patterns with industry benchmarks, aiding in vendor negotiations and resource allocation. 

When selecting a tool, consider your organization’s specific needs and budget. The best choice is one that enhances your forecasting process and integrates smoothly with existing systems.  

Step 3: Create Multiple Scenarios

Given the inherent unpredictability in the nonprofit sector, developing multiple forecast scenarios can be helpful. This process usually includes the creation of a conservative, moderate and optimistic forecast. 

For instance, if you’re running a community theater, your scenarios might look something like this:

• Conservative: Assumes a 10% decrease in ticket sales and a 20% reduction in grant funding due to budget cuts.
• Moderate: Projects stable ticket sales and grant funding with a small increase in production costs due to inflation.
• Optimistic: Forecasts a 15% increase in ticket sales due to a popular upcoming production and a 10% increase in individual donations following a successful fundraising campaign.

For each scenario, create a full set of projected financial statements, including an income statement, balance sheet, and cash flow statement. Importantly, each scenario should include a provision for reserves to handle unexpected emergencies or unforeseen challenges. A common practice is to aim for reserves that can cover 3-6 months of operating expenses. 

The value of this approach is that it prepares you for a range of possible outcomes. It allows you to develop contingency plans and helps you identify potential risks and opportunities in advance.

Step 4: Involve Key Stakeholders

Financial forecasting should be a collaborative process, involving input from various departments within your organization as well as executives of the organization, board members and advisors. This ensures your forecasts are accurate and comprehensive. 

Take the example of a forecasting meeting for a nonprofit launching a new program. The Program Manager can share the expected costs of the program, including both startup costs and ongoing expenses. Meanwhile, the development director could highlight a promising grant opportunity that may be a strong fit for the new program, helping to source the revenue required to fund the program. 

By integrating these viewpoints, you can create a more accurate and nuanced forecast. Regular meetings (monthly or quarterly) with all leaders in the organization help ensure your forecast remains up-to-date and aligned with your organization’s overall strategy. 

Step 5: Regularly Review and Adjust

Financial forecasting is an ongoing process, not a one-time event. Set up a system to review your projections regularly, comparing actual results to your forecast, using differences and percentage differences of actual to budget and comparisons of current year and prior year actuals. Use this information to refine your assumptions and improve future projections for the next budget season. 

For instance, let’s say you’re running a historical society museum. You implemented a new audio guide system and projected a 10% increase in admissions revenue as a result. After three months, you review your numbers and find that admissions have actually increased by 15%. Identifying this increase explains why you have a variance in your budget and allows you to better plan for the next budgeting season. This allows you the opportunity to balance visitor experience with proper care of your collections plus staffing concerns. Documenting any variances from your forecast streamlines future budgeting and forecasting cycles. 

Consider implementing a rolling forecast, where you continually update your projections for the next 12-18 months based on the most current information. This approach keeps your forecast relevant and responsive to changing conditions.

Future-Focus, Your Organization with Smith + Howard

Financial forecasting for nonprofits is both an art and a science. It requires understanding your organization’s unique landscape, analyzing historical data and adapting to change. Prioritizing this effort sets you up to better support your mission and ensure financial sustainability for your organization. Not sure where to start? Smith + Howard’s nonprofit accounting professionals can help, whether you want to enhance an existing system or build a comprehensive financial strategy from the ground up. Our team of expert nonprofit CPAs can help you craft a tailored forecasting system and maximize your organizational impact. Contact your advisor to start preparing for the future today.