What's in the Numbers? A workshop for mastering the power of financial tools

Nonprofit Finance Fund
®

What’s in the Numbers? A Workshop for
Mastering the Power of Financial Tools

Presented by

Kim Cook
Manager

Alice Richardson
Associate Director

September 23, 2010

This workshop was made possible with generous support from Greater Pittsburgh Arts Council

nonprofitfinancefund.org ©2010 Nonprofit Finance Fund ®

Rules of the Room

Speak freely

Ask questions

Please turn off all cell phones and other devices

Feel free to get coffee or get up and stretch

nonprofitfinancefund.org ©2010 Nonprofit Finance Fund® 1

Agenda

Introductions
 Nonprofit Finance Fund
 Today’s Participants

Definitions of Key Terms and Concepts

The Essential Budget: True Financial Story is Clear

The Ideal Budget: Addresses Balance Sheet Needs

The Advanced Budget: Communicates the Complexities
of Your Business

nonprofitfinancefund.org ©2010 Nonprofit Finance Fund®
®
2

Overview:
Nonprofit Finance Fund (NFF)

NFF connects nonprofit finance
to nonprofit success.
“We’re in the
business of
Serving thousands of nonprofit and
helping
funders nationwide since 1980
nonprofits run
 $175 million in loans; over $1 billion in better.”
capital leveraged for nonprofits
 Over 500 customized financial consultations
–Clara Miller, NFF
 Hundreds of strategic partnerships to
President and CEO
advance the nonprofit sector
 Thought leadership to advance friendlier
funding practices across the nonprofit sector


NFF’s Package of Consulting Services

Mergers,
Program Findings & Collabo-
Profitability Recommend- rations,
Modeling ations Strategic
Report Re-
alignments

Scenario
Planning Presentation
Small- Financial Individual- to Board & Critical
Group Situation ized Work Executive Juncture
Webinars
Peer Diagnosis Plans Team Financing
Workshops
Clinics & Analysis Cash Flow
Planning
Growth or
Financial Change
Financial Communica Capital
Reporting -tion Planning &
Assistance Coaching Campaign
Support

Introductory Core Financial Planning & Long-term,
Services Strategic Management Support Customized
Engagements

The NFF Triangle

Mission and Program
What you do, and how
you do it.

Capacity Capital

The people, space, and What resources and
processes that allow assets you to have
you to do what you do. to work with.


Introductions

Your name, organization, and role

Organization’s budget size

Characterize your comfort with finance: wizard or
apprentice?

Share one thing you would like to learn from today’s
workshop


Agenda

Introductions

 Budgeting Process
 Financial Statements



of Your Business

®
7

What Is a Budget?
Why Does Budgeting Matter?

A budget is an organizational plan for a
stated period of time, expressed in dollars
“Our needs are
Budgets help to: unlimited, but
our resources are
 Allocate resources limited. That’s
 Provide a road map why we need a
 Allow the organization to monitor progress budget.”
 Increase focus
 Set and clarify goals –Bruce Bonner, COO,
Children’s Literacy
Initiative


Overview of the Budget Process

Gather historical and new data

Project expenses

Forecast revenue

Reconcile

Approve

Monitor


Types of Financial Statements

Prepared internally by organization:
 Budgets
 Internal Financial Statements
 Typically revenue and expense ―actuals‖ compared to
budget
 Ideally, balance sheet included

Prepared by outside CPA firms:
 Audit/ Review/ Compilation
 IRS Form 990 (sometimes internally prepared)


How the Budget Relates to
Other Financial Statements

Statement of Balance Sheet Budget
Activities

Revenue Assets Liabilities Revenue
Earned
Budget Actual Variance
Contributed

Expenses Expenses
Personnel
Professional Net
Occupancy Assets
Support
Interest

Surplus / Deficit Surplus / Deficit

Where you’ve Where you are Where you’re
been now going


Agenda

Introductions


The Essential Budget: True Financial Story Is Clear
 Cash ≠ Revenue
 Total Revenue ≠ Unrestricted Revenue
 Unrestricted Revenue ≠ Unrestricted Operating Revenue
 No ―Carryover‖ Funds
 Restricted Receipts/ Releases
 Multi-Year Funding

The Advanced Budget: Communicates the Complexities of
Your Business


®
12

Cash ≠ Revenue

Budget should include revenue
 Revenue may or may not be in cash form yet
 Revenue can also be in the form of receivables

Budget ≠ Cash Flow Projection
 A cash flow projection is a separate document that
forecasts the timing of cash in and cash out of the
organization.
 Even if your organization uses cash basis of accounting,
the budget will present total cash in and out for the
entire fiscal year.
 Budget will not identify any potential cash flow
challenges that may occur during the year.


Brief Review:
Accounting Methods

Nonprofits typically use one of two methods* of
accounting

Cash Accounting
 Similar to balancing your checkbook
 Measures cash in and cash out
 Common for small and / or relatively simple organizations

Accrual Accounting
 A more comprehensive look at your financial situation
 Measures revenue earned and expenses incurred
 Revenue ≠ Cash

Accrual Includes
 Accounts Receivable: What others owe you
 Accounts Payable: What you owe to others

*Modified cash is a hybrid of Cash & Accrual used by some nonprofits


Cash ≠ Revenue
Sample Budget

College Prep & Tutoring Services
Annual Operating Budget
For the period: January 1, 2010 to December 31, 2010
($ in Thousands)

Revenue
Government Contracts $200 Receivable
Annual Fundraiser $100 Cash
Foundations $600 50% Cash

Total Revenue $900
50% Receivable

Expenses
Personnel $390
Professional Fees $200
Occupancy $100
Support $180
Depreciation $14
On the Budget, Receivables &
Total Expenses $884 Cash are “Equal”

Surplus (Deficit) $16


Revenue Flows Into Three “Buckets”

Unrestricted Temporarily Permanently
Revenue Restricted Restricted
Revenue Revenue

Earned Contributed Purpose Timing Endowment

Unrestricted Temp. Perm.
Net Assets Restricted Restricted
Net Assets Net Assets


Revenue Also Flows Among Buckets

Temporarily Unrestricted Earned Permanently
Restricted Contributions Revenue Restricted
Contributions Contributions

Temporarily Permanently
Restricted Restricted
Net Assets Net Assets

Net Assets Investment
Released from Income
Restriction

Unrestricted
Net Assets

Operating and
Non-operating Expenses


Total Revenue ≠ Unrestricted Revenue

 Budget should include only unrestricted revenue

 Do Not: Include the ―restricted‖ portion of revenue
 E.g. Restricted dollars received for a subsequent year

 Do: Track restricted revenue separately (either in a
separate worksheet or separate column)
 Estimate the amount of net assets that will be released
from restriction for the entire year
 Include this portion as unrestricted revenue in the
budget


Total Revenue ≠ Unrestricted Revenue
Exercise

Sources of Revenue in FY 2009
Question: Unrestricted Revenue? (Y/N)
Fee for Services $12.3 million Earned

YES

Speaking/Consulting Revenue $1.8 million Earned

YES

General Operating Support $14.5 million Contributed:
(various foundations) General
Operating
YES
Support

3-Year Foundation Grant (to $1.2 million Contributed:
be paid in equal portions) Restricted $400K YES
(Time) $800K NO

Foundation Grant to Fund $5 million Contributed:
Geographic Expansion Restricted
(starting in FY 2010) (Purpose) NO


Multi-Year Funding and
Timing Issues

Question:
 What if the timing of a multi-year grant makes it
look like we are running a surplus or deficit, but
that is not really the case?

Answer:
 The operating budget should include only the
current year’s portion of a multi-year grant
 The future year’s portions should be reflected in
the temporarily restricted column


What if Multi-Year Funding Makes it Look
Like We Are Running a Surplus or Deficit, But
That is Not the Case?
Immigration Reform Advocates
Budget: 2009 (Fiscal Year Ending 12/31)
($ in Thousands)
2008 2009 2010
Income Unrestricted Unrestricted Unrestricted
Grants $465 $231 $183
Grants Released from Restriction $0 $0 $0
Donations/Speaking Fees $30 $12 $40
Total Income $495 $243 $223

Expenses
Payroll Expenses $190 $252 $190
Occupancy $12 $12 $12
Events/Mobilization $10 $12 $12
In-State Travel/Meetings $8 $8 $8
National Travel $3 $5 $5
Radio/TV $2 $3 $2
Office Supplies $1 $3 $3
Meeting Expenses $2 $2 $2
Phone $2 $2 $2
Printing/Copying $1 $2 $2
Accounting/Bank Fees $1 $1 $1
Postage $1 $1 $1
Web Fees $1 $1 $1
Total Expenses $234 $304 $241

Surplus (Deficit) From Operations $ 261 $ (61) $ (18)


Multi-Year Funding Is Best
Tracked on a Multi-Year Budget

($ in Thousands)
2008 2009 2010
Temporarily Temporarily Temporarily
Income Unrestricted Restricted Unrestricted Restricted Unrestricted Restricted
Grants $165 $300 $231 $183
Grants Released from Restriction $100 ($100) $100 ($100) $100 ($100)
Donations/Speaking Fees $30 - $12 - $40 -
Total Income $295 $200 $343 ($100) $323 ($100)

Expenses
Radio/TV $2 $3 $2
Phone $2 $2 $2
Postage $1 $1 $1
Web Fees $1 $1 $1

Surplus (Deficit) From Operations $61 $200 $39 ($100) $82 ($100)


Showing Net Asset Balances Below the
Budget Can Also Reconcile Timing Issues
($ in Thousands)
2008 2009 2010

Revenue
Grants $165 $231 $183
Net Assets Released from Restriction $100 $100 $100
Donations/Speaking Fees $30 $12 $40
Total Revenue $295 $343 $323

Expenses
Radio/TV $2 $3 $2
Phone $2 $2 $2
Postage $1 $1 $1
Web Fees $1 $1 $1

Surplus (Deficit) From Operations $61 $39 $82

Temporarily Restricted Net Assets
Equality Foundation Net Assets Received $300 $0 $0
Equality Foundation Net Assets Released ($100) ($100) ($100)
Total Change in Net Assets $261 ($61) ($18)


Total Unrestricted ≠ Unrestricted Operating

Budgets should include only operating dollars

Non-operating dollars can be placed “below the line”

Managers should understand how to recognize non-
operating dollars:
 Capital campaign receipts
 Funds received to purchase capital items (e.g., new
computers, vehicles, etc.)
 Net assets released for non-operating expenses
 One-time, non-recurring gifts (e.g., unexpected bequest)
 Net gain/loss from disposal of an asset
 Realized or unrealized gains/losses on investments


Unrestricted ≠ Operating
Sample Budget
Historic House Museum
Budget: FY 2011
($ in Thousands)

Revenue
Donation Box $18
Annual Mail Campaign $85 $216K Sponsorships
Exhibit Sponsorship $216 Allocated to Cover
Exhibits
Individuals $450
Foundations $73
$2K Program Grant is
Special Events $124 Included in
Net Assets Released From Restriction $40 “Foundation” Line Item
Total Revenue $1,006

Expenses
Personnel $684
Professional Fees $101
Occupancy $151
Support $69
Unrestricted Operating
Results Clearly Stated
Total Expenses $1,005

Net Operating Income/Loss $1
Non-Operating
Revenue Shown
Other Income/Expenses “Below the Line”
Capital Campaign $5,000
Other Non-Operating Revenue $400
Total Non-Operating Revenue $5,400 Unrestricted Net Assets
Increase/Decrease by
This Amount
Change After Non-Operating Activities $5,401

Non-Operating Dollars Hide
True Operating Performance

Unrestricted Revenue & Expenses
(including non-operating) Operating Revenue & Expenses
($ in thousands) ($ in thousands)
1,800 1,800

1,600 1,600

1,400 1,400

1,200 1,200

1,000 1,000

800 800

600 600

400 400

Revenue, including
200 200
non-operating

0 Expenses (before
0
2003 2004 2005 2006 2007 2008 depreciation)
2003 2004 2005 2006 2007 2008

Revenue
With revenue for capital projects
Expenses (before
depreciation) ―below the line,‖ this organization
is not breaking even!


Budgeting Exercise:
Unrestricted ≠ Operating

Revenue Amount Operating or “Above” or
Non-Operating “Below” the
Line
Unexpected Bequest $400,000
NON-
BELOW
OPERATING

Exhibit Sponsorships that $216 million
Help to Cover Cost of
Traveling Exhibits OPERATING ABOVE

Program Grant Used to $200,000
Purchase Copier Paper &
Office Supplies OPERATING ABOVE

Unrestricted Capital $5 million
Campaign Dollars (Allocated NON- BELOW
to Building/Improvements
Fund) OPERATING


Do Not Include “Carryover” Funds

 General rule: Don’t use the term ―carryover‖

 ―Carryover‖ means different things to different people:
 Net Assets Released: Previously restricted dollars that are
released from restriction in the current year

 Savings:
– Savings ≠ Revenue
– Savings should not appear as revenue source in the budget

 Opening Cash Balance:
– Opening cash balance (i.e. cash balance at beginning of
fiscal year) ≠ Revenue
– Beginning of Year (BOY) cash balance should not appear as
revenue source in the budget


“Carryover” Is Confusing
Sample Budget

Budget: FY 2009 Budget In
($ in Thousands)
Original Form

Expenses
Payroll Expenses $252
Occupancy $12
Events/Mobilization $12
In-State Travel/Meetings $8
National Travel $5
Radio/TV $3
Office Supplies $3
Meeting Expenses $2
Phone $2
Printing/Copying $2
Accounting/Bank Fees $1
Postage $1
Web Fees $1
Total Expenses $304
Not Clear if
Income
“carryover” is
Grants $231 (1) savings or
Donations/Speaking Fees $12 (2) net assets
2008 Carryover $100
released from
Total Income $343
restriction


Improved Representation
Reformatted Sample Budget

REFORMATTED
($ in Thousands)

Revenue “Carryover” was
Grants $231 actually restricted
Grants Released from Restriction $100 funds released in FY
Donations/Speaking Fees $12 2009
Total Revenue $343

Expenses
Payroll Expenses $252
Occupancy $12
Events/Mobilization $12
In-State Travel/Meetings $8
National Travel $5
Radio/TV $3
Office Supplies $3
Meeting Expenses $2
Phone $2
Printing/Copying $2
Accounting/Bank Fees $1
Postage $1
Web Fees $1
Total Expenses $304

Surplus (Deficit) From Operations $39


Tracking Restricted Receipts/Releases

 It is important to track restricted revenue and releases

 One option: Use a separate column to show restricted dollars
received
 Similar to the presentation of the audited Statement of Activities
(Income Statement)

 Be disciplined with nomenclature:

 ―Net Assets Released From Restriction‖ = Restricted dollars that
were received in a prior year and released in the current year

 Do not name these funds as ―carryover‖

 Do not name these funds as ―restricted grants/revenue‖


Track Restricted Receipts and
Releases in a Separate Column
REFORMATTED
($ in Thousands)

Temporarily
Revenue Unrestricted Restricted TOTAL
Grants $231 $0 $231
Grants Released from Restriction $100 ($100) $0
Donations/Speaking Fees $12 - $12
Total Revenue $343 ($100) $243

Expenses
Payroll Expenses $252 $252
Occupancy $12 $12
Events/Mobilization $12 $12
In-State Travel/Meetings $8 $8
National Travel $5 $5
Radio/TV $3 $3
Office Supplies $3 $3
Meeting Expenses $2 $2
Phone $2 $2
Printing/Copying $2 $2
Accounting/Bank Fees $1 $1
Postage $1 $1
Web Fees $1 $1
Total Expenses $304 $304

Surplus (Deficit) From Operations $39 ($100) ($61)


Agenda

Introductions



 Savings Goals/Reserve Levels
 Capital Expenses
 Depreciation and Systems Replacement Planning

of Your Business

®
33

Savings and Reserves

Surpluses are necessary to the long-term health of a
nonprofit

By generating operating surpluses over time,
organizations can build cash reserves

To plan for future needs, estimate total reserves goals

Savings can be allocated to board-designated reserves,
helping to illustrate thoughtful, disciplined use of the
surpluses


The Statement of Financial Position and
the Statement of Activities Are Connected

Statement of Statement of Statement of
Financial Position Activities Financial Position
FYE 06/30/08 FY 2009 FYE 06/30/09

Assets Liabilities Revenue Assets Liabilities
Earned
Cash Contributed Cash

Expenses
Personnel
Net Professional Net
Assets Occupancy Assets
Interest
Surplus / Support Surplus /
Deficit Deficit

Change in
Net Assets

Take Away: Surpluses and deficits change net assets

Capital investment ≠ expense

 A building purchase/renovation is a transfer of resources
from one asset class to another

 Facility-intensive organizations are encouraged to:
 Prepare a separate capital investment budget for larger
facility-related projects
 Itemize smaller capital investments separately on the
operating budget for funding smaller projects out of
operating surpluses


Budgeting for Depreciation Encourages
Planning for Replacement Needs

Every fixed asset you purchase will depreciate over its
useful life
 Accountants use useful-life data for various types of fixed
assets
 By definition, fixed assets are capitalized (i.e., appear on
the balance sheet and are depreciated on the income
statement as a non-cash expense)

Reflects concept that fixed assets lose value over time

An approximation of how much cash needs to be set
aside for future replacements


Better Depreciation Estimates

Depreciation is an inexact estimate. Facility-intensive
nonprofits should also consider an engineering analysis
of future maintenance and replacement needs:
 A Systems Replacement Plan (SRP) maps the timing and
anticipated costs of maintaining and upgrading a facility
– Creates a detailed, long-range capital expenditure
budget
– Helps make an informed assessment of how many
funds are needed to maintain facilities
- Gradually each year, and/or
- Periodic capital campaigns


Systems Replacement Plan (SRP)

ABC Theatre CLIENT NAME
2010 FIRST YEAR OF PLAN
OPENING BALANCE OF RESERVE FUND 20-Year Reserve Requirement*
3.00% INFLATION ON PROJECT COSTS $ 781,125
0.00% INTEREST ON RESERVE BALANCES * value includes inflation and interest assumptions above.
Quantity
Sf / # units Cost per Unit Age Life Total Cost Comments
Architectural
Hazmats 1 $2,500 20 20 $2,500 Lead and asbestos testing should be done
North Façade 1 $50,000 20 30 $50,000 Modernizing for appearance
West Façade 1 $2,500 10 15 $2,500 Spot repairs are needed
Main Roof 3000 $15 20 23 $45,000 Replace roof
Steel windows 7 $500 45 25 $3,500 Replace and upgrade windows
Plate glass windows 172 $71 15 15 $12,212 Install new window system
Glass block 1 $250 15 15 $250 Replace sealant
Entrance doors 2 $500 15 20 $1,000 Repair doors
Egress doors 2 $1,500 20 20 $3,000 Doors, frames and hardware should be replaced
Carpet/lobby and theatre 2000 $5.00 12 15 $10,000 Replace carpet
Carpet/ Admin and rehearsal 1400 $5.00 12 15 $7,000 Replace carpet
VCT flooring/ costume, shop and dressing area 600 $6.50 17 25 $3,900 Replace flooring
VCT flooring/ equipment rm 150 $6.50 25 25 $975 Replace flooring
Sheet vinyl bathroom flooring 225 $6.50 12 15 $1,463 Replace flooring
Toilet room accessories 3 $2,000 15 20 $6,000 Replace partitions
Walls 1000 $3.00 12 20 $3,000 Repair and repaint walls
Suspended ceiling 4500 $2.00 12 20 $9,000 Replace ceiling
Theatre seating 130 $300 12 20 $39,000 Re-upholster or replace seating
Handrails 1 $500 12 15 $500 Handrails should be repair and repainted
Passenger elevator 1 $30,000 12 25 $30,000 Major overhaul will be needed
Mechanical
Sprinkler heads 66 $110 11 20 $7,260 Replace heads
Sprinkler system components 1 $10,000 11 40 $10,000 Replace components when necessary
Hot water heater 1 $2,000 7 15 $2,000 Replace when needed
Toilets 6 $800 11 25 $4,800 Replace toilets when necessary
Urinal 1 $1,150 25 25 $1,150 Replace urinal
Bathroom sinks 6 $525 11 50 $3,150 Replace when necessary
Bathroom faucets 6 $250 11 15 $1,500 Replace as needed
Drinking fountains 1 $1,700 11 15 $1,700 Replace when needed
Service sink 1 $400 11 15 $400 Replace when needed
Heating and cooling
AHU/ theatre and stage 1 $20,000 15 20 $20,000 Replace unit when needed or when ductwork is added
Air distribution/ theatre 1 $40,000 20 20 $40,000 Add or modify ductwork
AHU/ 2nd floor 1 $15,000 15 20 $15,000 Replace unit when needed or when ductwork is added
Air distribution/ 2nd floor 1 $20,000 20 20 $20,000 Add or modify ductwork
Rooftop AHU 1 $30,000 11 15 $30,000 Replace when needed(see report for details)
Rooftop condensing unit/theatre 1 $25,000 20 20 $25,000 Replace unit(see report for details)
Rooftop condensing unit/ 2nd floor 1 $7,000 2 20 $7,000 Replace when deemed unserviceable
Rooftop condensing unit/ 2nd floor 1 $7,000 20 20 $7,000 Relocate unit
Boiler 1 $15,000 35 35 $15,000 Replace boiler
Hot water heating pumps 2 $1,000 12 15 $2,000 Replace when deemed unserviceable
Exhaust fans 2 $2,500 11 15 $5,000 Replace fans
Exhaust fans/restroom 1 $5,000 15 15 $5,000 Relocate fan
Combustion air for boiler and hot water heater 1 $5,000 20 20 $5,000 Add fan


SRP: Budgeting for Annual
Contributions

Replacement Reserve Balances
($ in thousands)
400

300

200

C osts
100
Addition to Savings

0
Ending Reserve Balance
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

-100

-200

-300


Pulling it All Together:
Budgeting for Operations and Beyond

Can contributed revenue cover operations & capital costs?
$ in Thousands

$4,500

$4,000

$3,500

$3,000 One month's worth of savings

$2,500
Current principal on debt
$2,000

$1,500 Cash outflow for property and
equipment
$1,000
To break-even operationally*
$500

$0 Actual/projected unrestricted
2006 2007I 2008B contributed income

Current projected
Target fundraising goal
fundraising goal
*To break-even operationally: total expenses less earned revenue


Agenda

Introductions




of Your Business
 Program Profitability Dynamics
 Scenario Planning
 Reforecasting
 Cash Flow Planning

®
42

Program Profitability Budgeting

Program economics analyses are designed to help
answer the following questions:
 Which programs subsidize other activities and overhead?
 Which programs require subsidy from other fundraising or
program activity?
 How might we do business differently so that our programs
and capacity are fully and collectively supported?

Program economics analyses are used to:
 Inform strategic decision making around sustaining,
growing or cutting/changing programs
 Evaluate any trade-offs between bottom-line and mission
contributions
 Enable well-informed responses to operating changes
 Allocate resources among competing priorities


Sample Program Profitability Model

Programs Capacity
After Youth Senior Program Special Program Capacity
School Program Literacy Services Subtotal Fundraising Events Mgmt Admin. Subtotal Total

Revenue
(A) Earned
Government contracts $457 $110 $800 $1,367 $0 $1,367
Ticket Sales $0 $0 $0
Client Fees $156 $100 $256 $0 $256
Subtotal $613 $110 $0 $900 $1,623 $0 $0 $0 $0 $0 $1,623

(B) Contributed
Foundations & Corporations $113 $120 $233 $10 $10 $243
Government $27 $27 $80 $80 $107
Individuals $85 $85 $704 $242 $946 $1,031
Trustees $12 $12 $152 $185 $337 $349
Subtotal $237 $0 $120 $0 $357 $946 $427 $0 $0 $1,373 $1,730

Total Revenue $850 $110 $120 $900 $1,980 $946 $427 $0 $0 $1,373 $3,353

Expenses
Salary & Benefits ($441) ($80) ($525) ($1,046) ($188) ($85) ($475) ($748) ($1,794)
Consultants & Contractors ($239) ($100) ($172) ($511) ($20) ($175) ($195) ($706)
Professional Fees $0 ($48) ($85) ($13) ($146) ($146)
Occupancy ($112) ($259) ($371) ($62) ($46) ($108) ($479)
Office & Supplies ($3) ($12) ($5) ($20) $0 ($20)
Program ($85) ($8) ($10) ($103) $0 ($103)
Interest $0 ($20) ($20) ($20)
Miscellaneous ($15) ($29) ($44) ($44) ($15) ($102) ($161) ($205)

Total Expenses ($894) ($100) ($100) ($1,000) ($2,094) ($300) ($337) ($85) ($656) ($1,378) ($3,472)

Surplus/Deficit ($45) $10 $20 ($100) ($115) $646 $90 ($85) ($656) ($5) ($120)


Budgeting for Multiple Scenarios

Budgeting for different scenarios in the next fiscal year
is the simplest form of scenario planning

To reflect uncertainties in revenue and expenses,
different scenarios should be shown explicitly, not
averaged into one

Illustrating scenarios in clear financial terms can be a
powerful way to engage the board in a discussion about
actions that may be needed in the future


Budgeting for Different Scenarios

Name of Nonprofit: Museum of Art
Period Analyzed: FY 2011
9/10/2010 13:10
2011 Scenario Scenario
Numbers in 000s Budget % $ Description A % $ Description B
Revenue
Admissions $6 $2 $8 $6
Memberships $137 ($4) $133 ($12) Membership down $125
Education $68 $68 ($3) Loss of contract $35
Exhibits $76 $76 $76
Exhibit Art Sales $18 $18 $18
Rental Income $68 $7 Increased rental events $76 $68
Gift Shop Revenue $2 $2 $2
Government $34 $34 ($34) Loss of county grant $0
Foundations $65 ($15) Reduction of grants $50 ($65) Loss of grant $0
Other $43 $43 ($18) Death of major donor $25
Donations $62 $62 $62
Fundraisers 116 ($25) No $1K plate dinner $91 ($30) No $1K plate dinner $86
Total Revenue $695 $661 $503

Change from Budget Revenue
% -5% -28%
$ ($34) ($192)
Expenses
Wages & Benefits $436 $436 -10% Teachers reduced $392
Marketing & Public Relations $15 $15 $15
Automobile Expense $5 ($2) $3 $5
Exhibits Expense $22 $22 $3 $25
Special Event Expense $30 ($15) No $1K plate dinner $15 ($15) No $1K plate dinner $15
Insurance $13 ($1) $12 ($1) $12
Office Supplies $12 ($3) $9 ($1) $11
Shipping & Handling $15 ($3) $12 $15
Postage & Delivery $5 ($2) $3 ($2) $3
Printing & Signs $20 ($5) Cut newsletter $15 ($3) Cut newsletter $17
Professional Fees $23 $23 $23
Janitorial Expense $8 $8 $1 $9
Security $11 ($3) $8 ($2) $9
Other $34 $34 $34
Repairs 12 $12 $3 Trim trees $15
Utilities 30 $30 $3 Increased rates/usage $33
Change from Budget Expense
% -5% -8%
$ ($34) ($58)
Surplus / (Deficit) $4 $4 ($130)


Budget Reforecasting

Reforecasting the budget periodically involves revising
the annual budget throughout the fiscal year
 Requires creating a separate, revised budget and/or
forecast
 The original budget remains intact
 An effective way to monitor the budget

Reforecasting is informed by year-to-date results as
well as management’s best estimate of remaining
months
 Looking at year-to-date financials requires interpretation to
know if you are still on track


Reforecasting Is a Good Way to
Monitor Progress During the Year
Domestic Violence Service Provider
Period Analyzed: Budget 2011
($ in Thousands) Better Major
12/31/2011 3/31/2011 6/30/2011 9/30/2011 12/31/2011 (Worse) Reasons

Approved
Program Revenue Budget Projection 1 Projection 2 Projection 3 Projection 4
Earned Revenue
Federal Grants $78 $78 $68 $0 $0 ($10)
State 1 $176 $250 $250 $0 $0 $74
State 2 $19 $19 $19 $0 $0 $0
County $22 $22 $22 $0 $0 $0
Marriage Fees $32 $20 $20 $0 $0 ($12)
County Empowerment Grant $155 $155 $155 $0 $0 $0
Federal Allocation $162 $162 $182 $0 $0 $20
Contributed Revenue
Foundation $70 $70 $70 $0 $0 $0
Law Alliance $116 $116 $116 $0 $0 $0
Foundation 2 $6 $6 $2 $0 $0 ($4)
Shelter Makeover $35 $35 $40 $0 $0 $5
Community Foundation $15 $5 $5 $0 $0 ($10)
Corporate $30 $27 $27 $0 $0 ($3)
Women's Foundation $8 $8 $8 $0 $0 $0
Other $0 $25 $25 $0 $0 $25
Total Revenue $924 $998 $1,009 $0 $0 $85

Expenses
Payroll Expenses $601 $601 $681 $0 $0 ($80)
Program Food & Meals $11 $11 $11 $0 $0 $0
Client Financial Support $10 $10 $31 $0 $0 ($21)
Support $49 $49 $49 $0 $0 $0
Equipment/Furniture $0 $0 $15 $0 $0 ($15)
Outside Services $23 $23 $23 $0 $0 $0
Professional Fees $13 $13 $13 $0 $0 $0
Supplies $33 $33 $43 $0 $0 ($10)
Telephone/Communication $10 $10 $10 $0 $0 $0
Depreciation $10 $10 $10 $0 $0 $0
Maintenance & Repairs $16 $16 $36 $0 $0 ($20)
Property Taxes $1 $1 $1 $0 $0 $0
Security Expenses $0 $0 $0 $0 $0 $0
Utilities $12 $12 $12 $0 $0 $0
Building Expenses $19 $19 $26 $0 $0 ($7)
Overhead $139 $150 $151 $0 $0 ($12)
Total Expenses $947 $958 $1,112 $0 $0 ($165)

Surplus (Deficit) ($23) $40 ($103) $0 $0 ($80)


Cash Flow Projections

Ensure more visibility into the future by developing a
physical landscape of the timing and reliability of cash
in and cash out

 Distinguish between ―cash flow‖ issues and ―cash‖ issues
 Prepare cash flow projections at least on a monthly basis
and continually update based on actuals vs. projections
 Estimate how much cash to keep on hand and how much
short-term debt and/or reserves you will need to access
during low cash months


Monthly Cash Flow Projections:
A Basic Worksheet

Month 1 Month 2

A. Beginning Cash 100 120

B. Operating Cash In 50

C. Operating Cash Out 20

B-C Net Cash From Operations 30

D. Net Non-Operating Cash -10

A+(B-C)+D Ending Cash 120

100+(50-20)-10


Monthly Cash Flow Projections

Monthly Cash Flow, Based on Current Annual Forecast
Current
Feb. March April May June July August Sept. Oct. Nov. Dec. Total
Forecast
($ in Thousands) Jan. Plan Plan Plan Plan Plan Plan Plan Plan Plan Plan Plan Plan 2009

Cash (Opening Balance) $126 $126 $426 $859 $611 $583 $764 $1,457 $805 $454 $441 $112 $83 $126

Cash In
Government Grants and Contracts $4,572 $570 $200 $51 $200 $600 $500 $120 $99 $580 $0 $100 $751 $3,772
Developer fees $271 $11 $10 $17 $75 $43 $115 $271
Foundations, corporations, other $2,400 $450 $142 $293 $0 $100 $520 $20 $0 $0 $50 $100 $200 $1,875
Individuals $0 $0
Special events $40 $40 $40
CM Scholarship $8 $8 $8
Grants Receivable $1,188 $187 $500 $250 $250 $1,187
Contribution Receivable $631 $300 $200 $100 $31 $631
Total Cash In $9,111 $1,515 $1,053 $444 $491 $700 $1,287 $140 $174 $580 $93 $240 $1,066 $7,784
Cash Out
Salaries and benefits ($6,009) ($445) ($445) ($445) ($445) ($445) ($445) ($668) ($445) ($445) ($445) ($445) ($668) ($5,786)
Professional services ($160) ($75) ($1) ($1) ($2) ($15) ($8) ($4) ($12) ($116)
Program Costs ($417) ($31) ($31) ($31) ($31) ($31) ($31) ($46) ($31) ($31) ($31) ($31) ($46) ($402)
Interest Expense ($9) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($9)
Administrative costs ($472) ($21) ($27) ($54) ($27) ($27) ($54) ($41) ($27) ($54) ($27) ($27) ($67) ($452)
Occupancy ($330) ($7) ($15) ($47) ($15) ($15) ($47) ($22) ($15) ($47) ($15) ($15) ($55) ($315)
Accounts Payable ($613) ($413) ($100) ($100) ($613)
Accrued Salaries ($223) ($223) ($223)
Total Cash Out ($8,233) ($1,215) ($620) ($678) ($520) ($519) ($580) ($792) ($526) ($578) ($523) ($519) ($848) ($7,917)

Net Cash In/(Cash Out) From
Operations $878 $300 $433 ($234) ($28) $181 $707 ($652) ($352) $2 ($430) ($278) $218 ($132)

Cash Ending Balance (Before
Special Items) $1,004 $426 $859 $625 $583 $764 $1,471 $805 $454 $456 $12 ($167) $301 ($7)

Special Items
Line of Credit ($350 available) $100 $250 ($100) $250
Principal Payment(s) on Loan ($57) (14) (14) (14) (14) ($57)
2010 Revenues Rec'd in Cash in 2009 $100 $100

Cash Ending Balance (After
Special Items) $426 $859 $611 $583 $764 $1,457 $805 $454 $441 $112 $83 $286 $286


Takeaways

The budget that will best meet management’s needs will
transparently reflect the true unrestricted operating results of
the organization
 Cash ≠ revenue
 Total revenue ≠ unrestricted revenue
 Total unrestricted ≠ unrestricted operating revenue

Be disciplined about language and tracking process especially
with regard to restricted funds

Address special items like debt repayment and capital
investments - can easily be reflected on the budget page,
without being part of the budget

Consider using the following tools to better manage your
organization’s financial situation:
 PPM
 Scenario planning
 Forecasting
 Cash flow management


Nonprofit Finance Fund

Thank you.
To learn more about NFF,
visit us at nonprofitfinancefund.org

Contact

Kim Cook
Manager
Kim.Cook@nffusa.org
215-546-9426 ext. 120

®
53

Takeaway: Sound Financial Planning
Starts with Good Budgeting

1. Uses well-grounded/conservative numbers 6. Features balance sheet needs and goals
 Reflects external & internal realities  Plans for surpluses of sufficient size to
 Tends to be in line with peer organizations manage risk & pursue opportunity, including:
 Less revenue than you think you’ll get  Pay down debt
 More expenses than you think you’ll need  Repair/replace property & equipment
 Save as working capital
2. Reflects strategic goals and priorities  Establish/build reserves
 Program
 Staffing
7. Reflects risk and anticipates appropriate
responses
 Operating infrastructure
 Includes Plan B reflecting various scenarios
 Future growth or changes

3. Provides a clear summary overview 8. Adaptable to different audiences
 Executive management
 Revenue by each main category
 Program management (staff)
 Expenses by each main category
 Funders
4. Has backup detail  Board
 Revenue and expenses by line-item
9. Tells us what happened and why
 Fundraising/Gift pipeline
 Shows variance – actual results vs. original
 Clearly states assumptions and unknowns
plan
 Includes notes
5. Knows that cash ≠ revenue;
total revenue ≠ operating revenue
(accrual) 10. Is pretty
 Focuses on unrestricted dollars, including $ to  Legible—e.g., font size not too small
be released from restriction  Formatted to direct the reader to key items—
 Separates operating $ from amounts received e.g., bold the totals and surplus/deficit
for one-time or unusual items  Set print area


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