By Tim O’Brien, Senior Consultant
At a recent workshop on Strategic Planning and Sustainability, I spoke about the need to be mindful of the financial elements and consequences of growth. Most strategic plans that I have seen call for growth, but few spell out the financial aspects of how to grow in a sustainable way. Here are some suggestions about how to incorporate financial sustainability into the planning process.
Look at your strategic plan and ask, 'Have we planned for growth?'
- In our programs
- Program Support (general/admin and fundraising costs)
- Growth in fixed assets (equipment, facilities etc.)
- Growth in reserves to enable successful planning
- Adequate liquidity
- Ability to incur appropriate debt?
Include an analysis of growth that incorporates:
- Profitability of future budgets. Many nonprofits do not plan for surplus, and in fact resist the idea. Without a surplus, it is difficult to maintain the purchasing power of unrestricted reserves (net assets) which can provide the funding needed for growth initiatives. We might be able to grow direct program funds through grants, but we also need to think about growth in program support, infrastructure and capital needs.
- Debt capacity. As nonprofit organizations grow, so does their need for liquidity and proper debt management can be useful in assuring stable liquidity.
- Amount of unrestricted reserves. As growth is planned, having an adequate amount of unrestricted reserves provide another aspect of stability.
Strategic plans might call for growth in programs which in turn spawn projects which often involve large capital allocations with multi-year cash effects.
- Growth in capital assets will affect target liquidity for years to come; careful planning for fixed assets can help the organization avoid the problem of outpacing their internal capacity to deliver services.
- When evaluating a capital project, the key is whether the capital expenditure will cover all costs and provide an adequate return on invested capital? Return on Investment should be considered as a part of planning. This doesn't mean that the organization will turn down a capital proposal solely based on financial return, but having the decision-making data can help the organization decide on how to proceed. This kind of evaluation can help to assure sustainability.
- Provide cash forecasting as a part of the planning process.
While nonprofit organizations do not have the same financial objectives as a commercial organization i.e. creating wealth, they should in fact contain financial objectives of maintaining adequate liquidity and creating conditions for sustained growth. Adding financial sustainability as an objective in strategic planning and assuring that internal policies align with these objectives can add significantly to the success of planning efforts. Learn more about Tim's expertise.