Lesson 8 in the course How to Write a Nonprofit Business Plan
Okay. It’s time. Don’t panic. We’re going to talk about accounting. I know, most people hate thinking about it and it can be confusing. But it’s one of the first things you need to take care of to make sure your nonprofit stays financially viable. Otherwise, it won’t matter how much passion and drive you have – you won’t be able to serve the cause. So, I’m going to do my best to make things as painless as possible in this section. I’ll tell you what goes here, but I’ll also add a bit of the “how to.”
What is the financials section of the nonprofit business plan?
Essentially, the financials section of the nonprofit business plan is used to paint a picture of where the nonprofit will be (financially) in the future. You will list your assumptions about what will affect the nonprofit’s finances, create a set of pro forma financial reports (based on financial assumptions or projections), and paint a picture for your reader that shows the nonprofit can be financially viable. Once you are operating, you can use your nonprofit accounting software to build these reports to show your actual financials.
What are they? Whether you know it or not, you’re making assumptions about something. Do you expect to get $5,000 from a donor to help you get started? Do you expect 100 people to show up at your first event? How much money will that help you to raise? Your assumptions should connect to real, measurable things. Start with making a calendar, and write down what fundraising efforts you will use. When will you host fundraising events? How will you raise other support? When will most of your money come in? How much will it be? Also, think about the outcomes you want your nonprofit to produce. How much does it cost to accomplish these things? When will you incur those costs?
I recommend to most nonprofit founders that they start by thinking about all of their projected income for the year. You will need to create a plan to raise enough money to pay for all ongoing expenses, so let’s start thinking about the things you can do to make that happen. Any donation received or earned income (income derived by selling a product or service) will be used to pay for the nonprofit’s expenses. Take a look at your calendar. Use the fundraising numbers you assumed on the calendar. Make a spreadsheet that looks like this:
Operating expenses (fixed costs)
Now that you have an idea about how much income you will raise or earn, start thinking about the operating expenses you will incur over the next year. These are also referred to as fixed costs, overhead, etc. They include: utilities, salaries, advertising, insurance, interest (if you use a bank loan for anything), and rent (for an office if needed). Technically, to be GAAP compliant, you should include depreciation expense as well. Depreciation is a “paper” expense that your nonprofit incurs where you don’t actually pay anyone. It’s supposed to be used as a savings amount that you will eventually use to replace any equipment or other large assets when their usable lives are over. Some banks require an audit if you get a loan from them, so you’ll need to have that accounted for in those circumstances. Most of the nonprofits I work with are pretty small, and aren’t trying to get a huge bank loan, so accounting for depreciation isn’t really all that necessary for them. Just think of all of the ongoing expenses you pay others in order to keep things moving.
Utilities: Not just your electricity bill. It also includes phone, Internet, gas, etc.
Salaries: Anything you pay employees (hourly wages included) in addition to other employee expenses like healthcare.
Advertising: Look at the calendar and estimate the cost for each of the events you will put together. Also, take a look at any traditional advertising you may need to purchase. Include all of those things in this section.
Insurance: Not having it is like flying without a parachute. Get some.
Interest: If you took a loan, you’ll need to make payments on that loan. You’ll want to make sure you include the whole payment when you’re calculating your ongoing expenses.
Rent: If you pay any, include that here.
Once you have figured all of these out, you can put them on your spreadsheet. This spreadsheet is called the pro forma statement of activities. This example is a simplified version, but it’ll definitely get the job done.
Statement of activities
Essentially, the statement of activities gives you an idea of when you are bringing in more money than you are spending, and when the opposite is true. Overall, you want to bring in more money than you spend to be financially viable. The statement of activities will be one of the main reports you will use to manage your nonprofit. Include at least a monthly breakdown for the first year you will be in operation. Include years 2 and 3 as well (but you can simply give a yearly breakdown for these if you like).
Once you have created your pro forma statement of activities, you’re really on your way to proving you will be financially viable. In fact, the statement of activities is the physical representation of your business model. If you bring in more money than you spend, your nonprofit’s business model is working!
Statement of financial position
The statement of financial position is also called the balance sheet in the business world. It is typically used to measure the financial position of an entity at a specific point in time. It’s a snapshot of the nonprofit from a financial perspective. The basic equation used to create this report is:
Net Assets = Assets – Liabilities
Assets = things the nonprofit owns or is owed by someone else
Liabilities = things the nonprofit owes
Net Assets = the net worth of the organization or the value left over for future operations when subtracting liabilities from assets
Net assets can be unrestricted, temporarily restricted, or permanently restricted. In other words, sometimes you can spend/use them, and sometimes you can only spend the proceeds that they generate.
- Unrestricted: If a donor does not specify a restriction on his or her contribution, the amount received by the nonprofit is recorded as an asset and as unrestricted contribution revenues.
- Temporarily restricted: If a donor gives a gift for a specific purpose, that gift is temporarily restricted. It can only be used for the specified purpose and nothing else.
- Permanently restricted: If a donor gives money for an endowment, that money cannot be spent on operations, and must be held in perpetuity. That gift is considered permanently restricted.
Here is an example of a statement of financial position that details net assets by usability.
To build the pro forma statement of financial position, you’ll need to consider all of the activities that lead up to the date of the statement. For example, if you want to create a pro forma statement of financial position for the last day of the first year of operation, you’ll need to look at the statement of activities from that year, include any change in net assets, any asset purchases or sales, and any liabilities acquired or paid off.
Statement of functional expenses
The statement of functional expenses organizes the different expenses according to their function (program service expenses, management and general, and fundraising activities) and by the nature or type of expense (salaries, rent, etc.). You’ll typically want to include a pro forma statement of functional expenses in the financials section as well. Here is an example of a statement of functional expenses:
Statement of cash flows
The statement of cash flows of a nonprofit organization is similar to that of a for-profit business. This report details the organization’s changes in cash and cash equivalents for a given period of time. It’s extremely important to have an idea of your organization’s cash position at any given time, because it is possible to be very successful, yet still not have enough cash to pay bills.
For example, let’s say you have a huge fundraising event to secure donations for your organization. If a large bill comes due before those donations arrive, even though the future looks bright, you need cash now! Or, perhaps your organization has more expenses during summer than the rest of the year. If your normal inflow of cash is not enough to cover those expenses, you’ll need to save some from earlier in the year to pay for those expenses. Knowing when you will need cash is important for managing a nonprofit.
The statement of cash flows is broken up into three sections:
- Net cash from operating activities – the cash earned or raised minus the cash spent on operations during the given period of time (everything not accounted for in the investing or financing sections of the statement)
- Net cash from investing activities – the cash amount spent on long-term assets like vehicles, equipment, or buildings minus the cash amount received from selling long-term assets
- Net cash from financing activities – the cash amount received when borrowing money minus the amount of cash used to pay back loans during the period
Here is an example:
Once you have built all of your pro forma financial statements, you should have a very clear picture of where your nonprofit will be financially in the future. By including these things in your nonprofit business plan, you will help donors, lenders, and any other constituents to be confident that you know what you are doing and where you are going. You’ll also give yourself a roadmap of financial expectations for the nonprofit that you can benchmark against.
If you need some more help creating nonprofit financial reports, check our Academy course Intro to Nonprofit Accounting. You can also check out the Accounting Coach for an overview of nonprofit financial statements. Ready to start tracking your financials? Check out Aplos for your fund accounting software or church accounting software.
We’ve now basically covered all of the main pieces of the nonprofit business plan. If you’ve made it this far, you should have a clear grasp of your nonprofit. Check out our next lesson on creating the executive summary section of the nonprofit business plan where you’ll learn to sum up the entire plan in a meaningful and useable way.