Guide To Financial Projections and Forecasting for Nonprofit Organizations 

How much easier would your life in nonprofit finance be if you could just tell the future? You’d know that the grant wouldn’t be renewed, so you’d already have new revenue streams to replace it. You’d know the demand for your senior care program was going to increase two-fold, so you’d already know where the funds would come from to hire additional staff. No surprises, no stress.

While you likely can’t tell the future, you do have the next best thing: your data.

By forecasting revenue, expenses, and cash flow, nonprofits can strategically plan for future growth, navigate uncertainties, and demonstrate financial stability to funders. But creating accurate and actionable projections isn’t always straightforward.

In this guide, you’ll see why financial projections are essential for nonprofits, what information they should include, the models you can use to build them, and the common challenges you might face. By the end, you’ll have a clear roadmap to develop financial forecasts that empower your strategy and decision-making processes.

Key Inputs: Gathering the Right Financial and Program Data

To create precise financial projections, you need the right data. Pull from both internal reports and external insights to create a complete picture of your organization’s financial health and potential.

Historical Data

Start by analyzing your organization’s historical data. Review trends in revenue sources such as donations, grants, and earned income, as well as expenses across programmatic, operational, and administrative categories. Patterns from the last three to five years can offer invaluable insights into what to expect in the future. Understand any outliers, such as COVID or a local environmental disaster, but use that information to help you prepare for a similar issue in the future.

Work with your development team to assess how well your organization retains donors and secures funding. Financial metrics like donor retention rate, average gift size, and grant application success rates provide a sense of how reliable your funding streams are.

Industry Data and Trends

Review philanthropic trends to see if changes you are already seeing reflect the broader economy, or if there are changes coming that haven’t affected your financial statements yet. Compare your financial metrics, such as overhead costs and revenue diversity, against industry benchmarks to ensure you’re aligned with similar organizations.

Also, stay informed about any upcoming policy or compliance changes that could impact your operations. For example, shifts in tax laws or new accounting standards may influence your financial projections.

Partnerships and Technology

Review your current and future partnerships. For revenue-generating collaborations, such as grant-making agencies or corporate sponsors, evaluate whether these relationships are sustainable or poised for growth. Similarly, assess your contracts with vendors and service providers to identify if you are planning to cut back on any services or if there are potential price increases. Take stock of any planned upgrades or fees tied to your organization’s technology platforms.

What Should Be Included in Your Nonprofit Financial Projection

Accurate financial projections are comprehensive yet straightforward. They should focus on the following elements to guide your planning and decision-making.

Expected Revenue

Break down your projected revenue by source, such as individual donations, grants, corporate sponsorships, or earned income. Be sure to distinguish between restricted and unrestricted funds, because this affects your ability to allocate resources.

Expected Expenses

Detail your anticipated expenses by category, such as programs, operations, marketing, and administrative costs. This breakdown helps you pinpoint areas for potential budget adjustments.

Cash Flow Forecast

Forecasting cash inflows and outflows helps you plan for liquidity. Understanding when funds will be received versus when expenses are due will prevent cash shortages.

Planned Events or Milestones

Incorporate known or planned activities that could impact your finances, such as a new program launch, a major fundraising campaign, or a necessary repair.

Documented Assumptions

Every projection includes assumptions, such as seasonal trends, economic conditions, or changes in community needs. Clearly documenting these assumptions allows stakeholders to understand the context behind the numbers.

Forecasting Models: Options for Building Your Projections

Choosing the right forecasting model depends on your organization’s size, complexity, and funding dynamics. Here are some models to consider:

• Static Model: This is a single projection based on fixed assumptions, typically updated annually. It works well for smaller nonprofits with stable revenue and expenses but may lack flexibility for dynamic environments.
• Rolling Forecast: A rolling forecast is updated regularly, such as monthly or quarterly, and extends forward by a set time frame, such as 12 months. It’s ideal for nonprofits with fluctuating funding sources or evolving programs.
• Scenario-Based Model: This model accounts for multiple potential outcomes, such as best-case, worst-case, and expected scenarios. It’s especially helpful for organizations facing uncertainties, like variable fundraising results or changes in government policy.
• Program-Based Model: Designed around specific programs, this model tracks revenue, expenses, and return on investment (ROI) for individual initiatives. It’s best for nonprofits with diverse service areas or mission-driven goals.
• Grant-Driven Model: For organizations reliant on grants, this model focuses on the timing and amounts of awarded funds, including any restrictions or reporting requirements. It ensures compliance and smooth cash flow management.
• Cash Flow Model: This model emphasizes cash timing over accrual accounting, making it ideal for nonprofits with seasonal donation patterns or uneven expense schedules.
• Driver-Based Model: This model links projections to operational drivers, such as service units delivered, volunteer hours, or outreach activities. It provides a real-world connection between your financial data and mission outcomes.

Common Challenges and Limitations in Nonprofit Forecasting

While financial forecasting is essential, nonprofits often face challenges that can hinder accuracy and effectiveness.

Data scattered across different systems, such as donor management platforms and accounting software that don’t talk to each other, can create inconsistencies. Consolidating this information into a single connected ecosystem creates more reliable projections.

Another hurdle is over-optimism, where organizations underestimate potential shortfalls or risks. Balancing optimistic projections with conservative and moderate scenarios ensures you’re prepared for various outcomes. Focusing on the data can help you and your stakeholders stay realistic.

It’s also important to remember that financial projections are not static. Regularly reviewing and adjusting your forecasts based on new data and circumstances keeps them relevant. However, even the most detailed projections can’t account for every contingency—unexpected events like economic downturns or global crises require adaptability and resilience.

How to Use Your Financial Projections

When you create financial projections, you’re essentially crafting a plan that can shape the decisions your organization makes. These forecasts help you figure out the smartest way to allocate your funds, ensuring your financial priorities line up with your mission.

Tracking your cash flow—both incoming and outgoing—means you’re ready to meet obligations without worrying about running short. Projections also give you clarity when deciding whether to expand programs, start new initiatives, or scale services, allowing you to base choices on solid financial data.

Additionally, running “what-if” scenarios help you anticipate potential challenges and prepare backup plans to handle unexpected hurdles. On top of all this, accurate projections showcase your organization’s financial health and dependability, giving donors and funders confidence in your ability to manage resources responsibly.

Many grant funders ask for forecasted financials to understand how the award would support your work. Having these projections already completed or ready to be updated makes the grant application easier.

Build Accurate Projections with Fund Accounting Software

Fund accounting software can simplify your financial planning process. Built specifically for nonprofits, tools like Blackbaud Financial Edge NXT help ensure precision and save your team time. For example, subfund functionality can track revenue sources granularly, making it easy to separate restricted funds from unrestricted ones while staying compliant and transparent. It also integrates with the leading fundraising CRM, Blackbaud Raiser’s Edge NXT®, so data flows smoothly, reducing errors, and improving report accuracy. With flexible dashboards, you can focus on the financial data that matters most to your goals, helping you make more accurate forecasts. Curious about how this technology can support your nonprofit’s financial planning? Check out our data sheet, How to Save Time and Make Informed Decisions with Blackbaud Financial Edge NXT Reports.