Big Picture Financial Planning for Nonprofits (part 8 of a series)


Big Picture Financial Planning for Nonprofits (part 8 of a series)

By Tom Wilson Major Gifts Guru

Given the 7 steps of nonprofit financial planning:

  • Step 1 – Balance budget (no deficits allowed)
  • Step 2 – Establish contingency fund (5% of operating budget)
  • Step 3 – Rid short-term debt (debt negates endowment)
  • Step 4 – Build cash reserves (25% to 50% of operating budget – reserves are the key to financial stability)
  • Step 5 – Develop risk venture fund (10% of operating budget)
  • Step 6 – Fund special projects, equipment, and building needs (be sure to fund depreciation)
  • Step 7 – Strengthen endowment (to provide 20% of operating budget, donor designated endowments should retain excess earnings and market value)
The chart above shows how the financial model was applied to one of my clients a few years ago.

The good news, there was no debt. The bad news, their new building of 8 years prior was slowly strangling the organization.

The new building is really spectacular for this community and organization, but the operating costs were sucking all of the vitality out of the organization. Staff had been reduced, programs diminished, and visiting exhibits curtailed. They also needed a new warehouse of safe storage for their collections as well as a space to prepare exhibits.

We looked forward 5 years to estimate a $1.9 million operating budget. Then we started applying the stabilization financial model. To get between where we were and completion of the first phase of the plan we needed to add some bridge funding (cash that could be used until the endowment started producing more income).

The executive director also decided that the risk venture fund should be relabeled “artistic” and that a more aggressive target of 25% of budget established as more traveling exhibits were critical to driving membership and annual fund growth.

Because of the lack of many companies in town or the region, and the bare handful of philanthropic foundations capable of future funding grants, we decided upon a target of 30% of operating. $1.4 million of endowment was already on hand.

Given the vision for the organization, we then tested the financial objective of $17 million with donors to see what was possible (you can always hope). We came back after the philanthropic market research study recommending a phase 1 campaign of $6 million with a phase 2 long-term objective of the $17 million (the museum is involved with one billionaire). We shared both numbers with all board members, study interviews, and potential donors.

Donors got excited about the financial model; saw hope in the future; and the campaign was off and running. A couple of years later they are now over $4.5 million toward the phase 1 objective. Planned estate giving discussions are underway with long-time members so they understand the real long-term need of $17 million.

This is still a work in progress. It will be fun to see where they are 10 years after plan inception.

More to come – a large organization model.

This article is part of a series. To read the other articles, please see below:

Permanent Link: Big Picture Financial Planning for Nonprofits (part 8 of a series)

http://majorgiftsguru.com/2009/08/big-picture-financial-planning-for.html

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