Financial Plan For Nonprofit Organizations: A Foolproof Guide

“Good fortune is what happens when opportunity meets with planning.” So said Thomas Edison. Similarly, a financial plan for nonprofit organizations ensures no opportunities go missing and fewer ‘surprises’ may take an organization down. 

Why is a financial plan for nonprofit organizations important?

On the one hand, a common complaint most donors have is that their money doesn’t get to those who need it. The charity takes a massive percentage of the funds as ‘overhead and salaries, ‘ which reduces people’s desire to donate, especially for international projects. Plus, credit card companies and digital payment apps take a cut in transactions as well. 

On the other hand, Scott Harrison’s Charity: Water, founded in 2006, has raised $750 million in funds in the past 18 years to fund 150,000 projects in 29 countries.

Obviously, he found a solution to this problem. His fix? To plan for the cuts from the start. 

As Scott discussed in the ‘Early Days’ podcast, he had to cover $30 for every $1000 donated since he only got $970 of that. He added $30 from overhead and then found different ways to get the money to cover that—which didn’t involve the average donor on the street. 

But by planning for that cut from the start, he could prove to donors that every cent they donated to a cause was going to that cause. 

This is the power of planning, and it is why a financial plan for nonprofit organizations can make the difference between fond hopes and fulfilling your goals. 

To boil it down to bullet points. A nonprofit financial plan is crucial because:

• A financial plan helps align the organization’s resources with its strategic goals. 
• It provides a roadmap for growth, sustainability, and achieving long-term objectives.
• It sets budget priorities, ensuring that funds are directed towards impactful activities.
• It prevents overspending or underfunding critical areas.
• It helps the nonprofit stay compliant with financial regulations and reporting.

In this article, we shall examine what documents and numbers you need, and five steps you must take to make a perfect financial plan for your nonprofit, along with some expert tips on how to make sure your planning works for you. Let’s begin. 

Important financial planning documents

It helps to assemble essential documents before you begin making a financial plan for nonprofit organizations. Here’s a list of the most commonly required documents. 

Balance sheet (Statement of Financial Position)

This shows the organization’s assets, liabilities, and net assets at a specific point in time. It also helps you see current asset levels compared to liabilities (liquidity), trends in net assets (growth or decline), and the reserves available for planned initiatives and fundraising events.

Income Statement (Statement of Activities)

This document summarizes revenues, expenses, and changes in net assets over a specific period, usually the past year. It also lists sources of income and their sustainability, expense allocations, and any surpluses or deficits.

Chart of accounts (COA)

This is a structured listing of all financial accounts that tracks and reports the organization’s economic activities. Nonprofits require a tailored COA that reflects their unique needs, including program-specific accounting, restricted funds, and compliance with donor and regulatory requirements.

Read Also: 501c3 Fundraising And Donation Rules You Must Know

Tax forms

Nonprofit organizations in the United States must file specific tax forms with the IRS to maintain their tax-exempt status and comply with federal regulations.

Here are some essential tax forms related to a nonprofit organization’s finances you should assemble. 

Every nonprofit must file other forms and documents with the government to maintain its status and exemption and receive donations. 

After assembling and studying these documents, you are not prepared to form a great plan for the future with the numbers at hand and a firm understanding of your nonprofit’s financial position. So, let’s look at the next steps. 

5 steps to a great financial plan for nonprofit organizations

A well-crafted financial plan ensures a nonprofit maintains a healthy cash flow and can meet its obligations even during lean times. Contingency planning identifies potential financial risks and establishes strategies to mitigate them, building organizational resilience.

So, before we get to the perfect plan, here are some steps a nonprofit must take. 

Assess your current financial status 

Measuring a nonprofit’s financial status can be challenging since everything could change with a single large donor or a legacy gift. However, looking at past trends and analyzing them is critical, keeping the chances of outlier occurrences to one side. 

Here are the numbers you need over the past few years to effectively check a nonprofit’s financial status. 

The numbers you need: 

• Balance Sheet: Examine assets, liabilities, and net assets.
• Income Statement: Review revenue and expenses. 
• Cash Flow Statement: Analyze cash inflows and outflows.

The analysis you should make: 

• Current Ratio: Current Assets divided by Current Liabilities (measures short-term liquidity).
• Debt-to-Asset Ratio: Total Liabilities divided by Total Assets (assesses leverage and debt burden).
• Program Efficiency Ratio: Program Expenses divided by Total Expenses (gauges how much is spent on the mission versus overhead).
• Operating Reserve Ratio: Unrestricted Net Assets divided by Annual Expenses (shows how many months of expenses are covered by reserves).
• Fundraising Efficiency: Calculate the cost to raise a dollar (Fundraising Expenses divided by Total Contributions). 

Compare current performance with previous years to identify revenue, expenses, and reserve trends. Look for patterns that indicate growth or challenges. 

For the big picture, you must discover ‘Budget Adherence’—compare actual performance against the planned budget in the past five years. Identify significant variances and investigate their causes.

Reviewing these areas regularly, a nonprofit can maintain a clear picture of its financial health and make informed decisions to support its mission.

Read More: How to Build an Amazing Nonprofit Fund Development Plan with Minimal Spending

Create a financial planning template

Your template should have revenue and expense projections and a monthly breakdown of expected income (which you regularly update with actual income received).  

The goal is to clearly understand the budget overview, which includes ‘Total Projected Revenue,’ ‘Total Projected Expenses,’ and ‘Net Surplus/Deficit’. 

Here are some sample tables indicating what a financial planning template should look like. 

Sample revenue projections:

Sample expense projections: 

Sample cash flow plan

So these are the main ‘numbers’ you need to track. However, a nonprofit financial statement is more than counting all the numbers. It must also define the goals, risks, and ‘Key Performance Indicators (KPIs).’ 

It also helps if your plan contains important dates, like the board’s review date, the mid-year review date, and any assumptions you have made in creating projections, such as economic factors, donor behavior, or grant renewals.

This is a hint of what should be included and the format. Every nonprofit must customize its financial template based on the most relevant numbers. 

Set goals/budget for spending and fundraising

Once you understand your financial goals and have a sample financial template, you can finalize the most critical part of a financial plan for nonprofit organizations – goals and budget. Here’s a brief look at what you will have to decide: 

• Goals: This includes listing the mission statement and the actual goals—e.g., expanding outreach by 20%, increasing fundraising revenue by 15%, etc. 

• KPIs: This includes program efficiency, fundraising efficiency, the planned operating reserve ratio, and the fundraising ‘Cost-to-Revenue’ ratio. 

• Risk assessment: This includes factoring in significant losses like the loss of a major grant and the outlay assigned to mitigate such a loss – a reserve fund or further budgets allocated to fund diversification. 

• Planned campaigns and events: This includes allocating additional funds for an annual gala or an extensive ‘Giving Tuesday’ campaign. 

Once you have listed these action items and estimated their monetary costs, you can have an estimated budget for the next year and trim or expand your financial plan appropriately. 

Hire the right financial planning experts

Here are a few roles that are necessary if a nonprofit wants sound financials. Along with some options and a low-cost solution for nonprofits as well. 

Must have roles:

Chief Financial Officer (CFO): This role develops long-term financial plans and oversees budgeting, forecasting, and financial reporting. It also ensures compliance with financial regulations and reporting requirements (e.g., Form 990 in the US).

Finance Manager/Director: This role handles day-to-day financial operations, including budgets, monthly financial statements, and cash flow analyses.

.Accountant: This role records and reconciles all financial transactions, manages payroll, and maintains the books of accounts.

Optional (but convenient) roles to have: 

Grants and Compliance Manager: This role ensures compliance with grant and donor requirements, including monitoring the use of donated funds for specific tasks. The role also prepares financial reports for grantors.

Fundraising consultant: The role helps develop sustainable funding strategies and assist with fundraising planning and campaigns. 

If you are a small nonprofit, you can consider the following to reduce the cost of these roles: 

• Hiring a part-time accountant or engaging a financial consultant.
• Outsourcing payroll and accounting to a third-party service.
• Using volunteer finance experts sought out through professional networks.

Invest in good budgeting software

For every trying to make the perfect financial plan for nonprofit organizations, a good budgeting software is essential for two primary reasons. 

1. For ease of maintaining the financial records needed by regulations and for the smooth running of the nonprofit. 
2. To automate financial data entry tasks to a great degree, freeing resources and lowering costs 

You should research features, cost, and usability to choose the right accounting software. It is also crucial to look at customer reviews online at places like Capterra, a software review provider. 

All budgeting software provides you with accounting solutions and a means to track your finances. So here is a look at some suggestions, along with some features that make each software unique. 

QuickBooks Enterprise Nonprofit: Track expenses and donations, budget by campaigns, compare to actuals, and create donor and grant reports. You can also accept donations and store donor information. It also includes payroll abilities. 

Software4Nonprofits Accounts: Track funds from grants and special programs, create a custom chart of accounts, integrate donation tracking software, identify tax-deductible income, and access unlimited customer support. 

Araize FastFund Accounting: This unique service offers total remote access. You can access it from anywhere worldwide for comprehensive accounting, fundraising, and payroll services. You can access it from any web browser on any device, including a Mac, PC, or tablet. 

Assembling these tools, numbers, templates, and resources should be all you need to make an excellent plan. Now, let us move on to some best practices you should keep in mind for your plan. 

Financial plan for nonprofit organizations: Best planning practices

Even the best most detailed financial plan is not going to work unless you have certain good ideas guiding your plans. So here are four best practices that will put your plans on the path to success. 

Research your market

Many nonprofits operate under the assumption that their cause is just, so donations should come in. But this is only sometimes the case. Like any space involving money, even donations are a ‘market’ affected by market forces like supply and demand, saturation, rewards, and consumer behavior. 

You need market research to understand: 

• Revenue generation: Are you appealing to the right kinds of donors? Or is your focus on a sector that already has too many requests for donations? Are your demands (and ways to donate) in line with what people donating to similar causes expect?
• Resource allocation: Are you over-allocating resources to programs with much participation? Are you spending more than other nonprofits on overheads and salaries? Do you have the right number of employees and volunteers?  
• Long-term sustainability: How have similar nonprofits fared in your field? Have any of them closed down? Why? Is your approach leading to diminishing returns?’

Ultimately, this market research must cover unmet needs, emerging trends, and funding gaps.

It helps:

• Guide the development of new programs or services.
• Support strategic decisions, such as expanding into new geographic areas or populations.
• Enhances marketing and fundraising strategies to attract specific donor demographics.

Explore additional revenue streams

In addition to traditional sources like grants and donations, nonprofits should explore diversified revenue streams to reduce dependency on any single source. Every nonprofit should explore the following diversified avenues (or expand them if they are already being pursued). 

Individual Giving

Increase ways for individuals to donate consistently, and give them the means to extend your donation opportunities to their friends and family. Consider adding: 

• Monthly giving programs
• Peer-to-peer fundraising campaigns
• Offer membership fees for access to exclusive resources or events.
• Utilize hybrid models for both in-person and online participation.
• For a subscription fee, offer access to premium content, newsletters, or exclusive events.

Major gift giving

As major gift-giving is the most stable and predictable stream of income for a donation-based organization, nonprofits should diversify the ways one can give major gifts, beyond the usual corporate partnerships for programs or sponsorships during events. 

• Cause-based marketing campaigns (e.g., ‘buy one, give one’ models).
• Workplace giving programs or matching gifts.
• Host galas, charity runs, auctions, or benefit concerts.
• Encourage supporters to include the nonprofit in their wills or estate plans.
• Offer options for gifts of stocks, real estate, or life insurance policies.

Read Also: The Complete And Easy Guide To Nonprofit Charity Auctions

Grants and Long-Term Partner Funding

• Focus on multi-year funding opportunities.
• Partner with other nonprofits on joint grant applications.
• Partner with companies for revenue-sharing on referred customers.
• Promote mission-aligned products or services with affiliate links.
• Lease unused office space, event venues, or equipment to other organizations.

Peer-to-Peer Fundraising

This expands the reach and raises funds with minimal staff effort.

• Empower supporters to create their own peer-to-peer fundraising campaigns.
• Encourage social media sharing and personal connections.
• Supporters running marathons or hosting birthday fundraisers on behalf of the nonprofit.

Earned Income Ventures

Develop social enterprises or businesses aligned with the mission (e.g., thrift stores, cafes).

• Sell branded merchandise (e.g., T-shirts, mugs).
• License intellectual property like training materials or research findings.

Major Donors: Retain, revamp, and renew

By focusing on communication, personalization, and involvement, nonprofits can build meaningful relationships with donors, increasing retention rates and fostering long-term support.

On the financial side, some of these steps will impact your budget. However they are still critical and must be allocated the appropriate funds. 

Appreciation: Factor in the cost of sending personalized thank-you notes, newsletters, annual reports, and holding special events exclusively for major donors. This will pay dividends, as those who feel appreciated will stay longer. 

Keep in touch: Avoid only asking for money—focus on education and involvement, too. Assign staff or volunteers to engage with major donors regularly, including celebrating their birthdays, anniversaries, or donation anniversaries. And just keep in touch regularly through lunches and meetings. 

Use Technology: Pay for donor management software to track giving history and preferences. Use them to segment donors based on interests, giving levels, or engagement history. This lets you send tailored messages, e.g., program-specific updates for donors who funded specific initiatives.

Financial plan for nonprofit organizations: Stick to your policies

Policies serve as a framework for making financial decisions that support the nonprofit’s mission. They prevent resources from being allocated to activities that stray from the organization’s purpose and keep financial planning focused on long-term strategic goals.

Sticking to these policies goes beyond just adhering to a plan. Here’s what it signifies:  

• Responsible stewardship of funds, leading to greater donor trust. 
• Reduces errors or legal issues arising from noncompliance. 
• Avoids emotionally driven decisions that could negatively impact finances.
• Establishes protocols for handling unexpected financial challenges or opportunities

So stick to the plan and make sure it comes to fruition. 

Financial plan for nonprofit organizations: Next steps

Effective financial planning is the backbone of a thriving nonprofit, enabling your organization to pursue its mission with confidence and sustainability. 

But financial planning doesn’t happen in a vacuum—it’s closely tied to compliance with nonprofit regulations. If you’re ready to deepen your understanding of the rules that guide 501(c)(3) organizations, including tax benefits, restrictions, and reporting requirements, check out our work on 501(c)(3) regulations. 

Staying informed is the key to financial health and organizational integrity.