Board Leadership: Financial Projections Help to Flesh Out Scenario Plans

Posted on by Hilda Polanco, Board Leadership Facilitator

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Allison Trimarco’s post “Living in (and Planning for) Interesting Times” does an excellent- — and practical — job of walking organization leaders through the process of scenario planning in conditions of uncertainty.

As Allison says — “The right time to consider what you should do when conditions change is before they change.”

By outlining our intended actions and responses to plausible future developments we can more thoughtfully and strategically prepare for the consequences of disruption, rather than having to react unscripted in what can be a confusing and emotionally charged moment. We can’t ensure that we’ll like the circumstances we end up in (as many of us today are well aware), but at least we’ll have a plan to deal with them.

As a financial planning consultant, I want to take as my point of departure item six in Allison’s list of scenario planning steps: “consider the finances.”

While creating budgets for unknown (and perhaps unknowable) futures can feel more like an exercise in astrology than economics, any scenario planning exercise that contemplates significant change should include at least a high-level estimate of the financial impacts and implications of the changes being envisioned. This also helps to ensure that your scenario plans are specific enough to be good guides to action when and if it comes time to actually execute.

In a post last year titled “Getting Your Nonprofit Budget Past ‘One Day (or Year) at a Time,’” I described an approach to multi-year planning that considers the financial impact of internal decisions or external factors that extend beyond the time horizon of the fiscal year budget. Without too much adjustment, that kind of approach can be used for the kind of scenario planning Allison describes as well. Once your organization has identified the scenarios it is likely to encounter, defining and quantifying your responses starts the process of estimating the financial consequences.

From a financial perspective, the first question we generally ask in scenario planning is “how would this affect staffing and personnel costs?”

Seventy to 80 percent of the typical nonprofit budget is related to personnel (salaries, taxes, and benefits) so staffing considerations will be the biggest cost-side driver of any financial projection. If the scenario being contemplated is the loss of a significant government contract or a major private donor, for example, your response may be to scale back on a program and lay off staff. What would the scale of the downsizing need to be in order to establish a financial equilibrium? Other scenarios may have less obvious implications on staffing. Perhaps an anticipated change in the political environment would increase the need for services of a particular constituency of your organization. In that case, you may need to

Other scenarios may have less obvious implications on staffing. Perhaps an anticipated change in the political environment would increase the need for services of a particular constituency of your organization. In that case, you may need to reallocate staffing resources or even add additional staff. Quantifying your staffing plan under different scenarios—even if only an estimate—helps to clarify the financial as well as operational picture moving forward.

Besides personnel, what other costs will be impacted by your anticipated scenarios and responses? Even costs that aren’t directly related to personnel are often indirectly driven by staffing levels — organizational expenses like travel, supplies, and technology will generally increase or decrease along with headcount. But be sure to consider anything in the scenario that would entail significant cost implications — an expiring lease, for example, may lead to an increase in rent, or alternatively may be an opportunity to re-evaluate space needs in a way that reduces costs. Whatever your scenario plan entails, evaluate and quantify its effect on expenses.

But be sure to consider anything in the scenario that would entail significant cost implications — an expiring lease, for example, may lead to an increase in rent, or alternatively may be an opportunity to re-evaluate space needs in a way that reduces costs. Whatever your scenario plan entails, evaluate and quantify its effect on expenses.

Obviously, we don’t want to forget about the income side of the equation either, although that is commonly “built in” — most scenario planning is driven by uncertainty or risk around revenue, so the scenarios themselves incorporate revenue projections or alternatives.

If your plans include assumptions that would increase or decrease revenues be sure you are considering that in any financial projections, although be careful to err on the conservative side in projecting future revenues. Overly aggressive revenue assumptions can lead to trouble down the road if those assumptions fail to bear out, particularly if your organization has limited financial reserves to begin with.

Developing financial projections helps add specificity to the process of scenario planning, so that if the time comes to “pull the trigger” on a response, your organization will go into uncertain times with a better sense of what that response looks like and what it means for your bottom line.


Hilda_polanco2Hilda Polanco is the Founder and CEO of Fiscal Management Associates, the go-to advisor foundation and nonprofit leaders seek when addressing nonprofit financial management capacity. Hilda provides capacity building, training, and coaching services to foundations and nonprofits throughout the country.

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