What-If Scenarios to Help Sustain Your Mission in Uncertain Times
By Jacqueline M. Tiso, Founder & CEO, JMT Consulting
Discover an easily implementable process for protecting the financial health of your organization during periods of economic unpredictability.

Table of Contents

• Financial Scenario Planning
• Selecting a Solution: All-in-One or Best in Class
• Creating a Range of Scenarios
• Stress Testing Your Organizing
• Look at the Details Within Your Programs
• Answering Unexpected Financial Challenges
• Developing Scenario Action Plans
• Keep Focused on Your Mission

Even during the best of times, a nonprofit’s actual financial situation ends up being either under or over budget projections. The financial assumptions for the coming year and/or the economic and societal forecasts that were used within the financial planning process are not always right. There are also unforeseen circumstances that weren’t considered when developing projections. We are all just human, and many are inherently optimistic when looking to the future. After all, it’s one of the traits that drives us to focus on mission-driven nonprofit work.

However, during periods of economic and/or political uncertainty, predicting the future financial health of a nonprofit becomes even more challenging, Meanwhile, having an accurate picture of it becomes even more critical for sustaining its long-term health.

To overcome uncertainty, JMT Consulting recommends that organizations identify the possibilities and then create plans for addressing each conceivable outcome. It is not as daunting and time-consuming as it might seem, and the overall process of identifying and addressing the possibilities, even remote ones, can identify any needed adjustments in the organization’s fundraising strategy and programmatic delivery.

Best yet, one the planning is complete, having the “what-if” scenarios and roadmaps for addressing them will alleviate the stress of tackling anu issues you may encounter.

Financial Scenario Planning

Over the years, financial scenario planning has proven to be an effective and proactive approach for nonprofits to address financial uncertainty. In fact, according to Gartner, financial scenario planning, “allows CFOs and other finance leaders to anticipate market shifts and economic changes so they can develop contingency plans and set key initiatives.” McKinsey, as a result, has “observed a sharp increase in the number of organizations applying scenario-based planning approaches to manage the uncertainty of the current situation and ensure they have sufficient cash reserves.”   

But what is financial scenario planning? Simply stated, it’s an approach that enables the nonprofit to test possible strategies for addressing unexpected economic shocks, sudden market shifts, donor loss, and other crises, so your nonprofits can remain healthy.

Best yet, there is a truly simple process that nonprofits should undertake: First, identify all the possible financial scenarios that the entity might encounter and then “stress test” each one to determine if and how the organization can not only survive that situation, but also how to respond to it so that you can ensure continued success.

Even if a specific scenario does not come to fruition, developing and stress-testing it can help provide the organization with some direction and confidence should its fortunes suddenly change along those lines.

Selecting a Solution: All-in-One or Best in Class

The first step is to identify the financial planning tool you will use. There are two options: A “best-in-class” solution that performs a specific, specialized task (in this case, financial planning), which we recommend, or an “all-in-one” solution, which claims to let you do a bit of everything.

Why avoid an all-in-one solution that (attempts to) cover both financial management and financial planning? Because the financial management solutions that also claim to have a budgeting module in them are not fully fleshed out financial planning tools.

Meanwhile, “best in class solutions” offer users deeper functionality.

In selecting your solution, don’t be hesitant if the financial planning tool is from a different publisher than your financial management solutions, because most connect seamlessly, enabling you to feed data from one to another. That way, the financial planning solution is using data from your financial management solution as a baseline to perform the analytics that build the forecasts.

For financial planning and analysis (FP&A) stress testing, we recommend Martus. Based on our experience testing multiple financial planning tools, this one is the best at developing the data-driven, forward-focused scenarios you need for adequate stress testing.

A popular platform that many nonprofits try to use for financial scenario planning, but we don’t recommend is Excel. Why? Because legacy manual spreadsheets like this one lack the advanced predictive functionality needed for conducting this process; require more time to use; and has a greater risk of error.

One more thing to remember: For the nonprofit’s well-being, you will need to bring broader strategic thinking to the process than what is typically found in the more tactically focused, executional world of CPA firms. Since every job function impacts finance, you will need to assemble a financial scenario planning team that understands all functional areas. However, you will also need to look for the data and what to look for.

Creating a Range of Scenarios

To construct your potential financial scenarios, solutions like Martus can extrapolate and identify the stress points, trends, and adjustments needed to level off these trends. That’s the simple part.

The hard part is the human component. Nonprofit employees—even those in the C-Suite—tend to be mission-driven, focusing on the positive outcomes of their work, such as educating, organizing, feeding, housing, and more. They can’t imagine anyone stealing from them, but it happens more than anyone cares to admit.

To overcome this inherent optimism of mission-driven nonprofit employees, organizations might want to start with the most optimistic possible scenarios before they work to identify (and address) the rest of the potentialities, ending with the scenarios that show the worst possible outcomes.

When creating the scenarios, it is essential to be clear-headed about the dependability of the income streams. What is your track record of bringing in recurring, unrestricted revenue? Do any of these streams generate a surplus? Are any of these streams at risk? Some other factors to explore, according to the Nonprofit Financial Fund (NFF) are the liquidity of your assets, your liabilities against your cash flow, and the ability to maintain your fixed assets, should you have any.

Finally, you need to determine your “financial runway”—how long you can survive based on available cash, the endowment, and other easily liquidated assets.

Stress Testing Your Organization

Once you have the complete range of scenarios, the next step is to “stress test” each one, asking what would happen if it came true and how you could better thrive or even survive in such an environment. 

The first, most basic area to look at when conducting a stress test is the financial systems and processes you have in place. Your tools should be able to track the overall financials of the organization as well as the individual programs, the restrictions on any of the funds, and other key factors, within annual or quarterly audit.

Recognizing that hiccups in income can happen within any organization, the next step is to look at the flow of income and the amount of financial reserves the nonprofit has on hand – the fewer sources of income, the higher percentage of cash that should be maintained in case the flow of revenue from a source gets disrupted.

And you should identify any outstanding debt, legal issues, restrictions on any funding, and any other occurrences that could disrupt the financial health of the nonprofit, as well as the liquidity of your assets, and what assets can be used should there be an interruption from an income source.

Look at the Details Within Your Programs

Bringing in revenue and “balancing the checkbook” is just one part of the picture. You also need to look at the programmatic level. We even suggest you start with your individual programs, not with the overarching revenue.  How are your programs being funded? What      is the revenue source for each program? What are the restrictions on the revenue, if any? What are the charges (the expenses) for each program? And – this is key – how is each program delivering on your overall mission? These are the most basic questions that need to be answered.

Keep in mind that nonprofits rarely consider financial planning from this perspective. As a result, they often have one or more programs that, while supporting their mission, are running at a significant deficit, which is usually buried deep within a balanced organizational budget. The leadership team often isn’t even aware that a program is being subsidized by other programs, creating internal costs that have implications for the rest of the nonprofit.

Likewise, many nonprofit leaders often secure funding for a program but fail to understand that they still lack sufficient financial support for it or that the level of effort required by the funding source will increase the deficit. Instead, the leaders often think, “We just got another million dollars so that we can deliver even more.”

To decide if they should keep the program, leadership needs to first determine if it is truly supporting the overall mission, and, if so, if it is worth internally subsidizing it, deepening their deficit. They might decide that it is worth keeping for the brand or other benefits. Or they might take the hard step of eliminating the program, so they can better focus on the other ones that also deliver on their mission.

Once you complete this step, you will have a holistic appreciation for the organization and be able to clearly state that “our mission is (drop in yours), and this mission is represented by these (drop in number) of programs.”

Answering Unexpected Financial Challenges

Keep in mind that no plan is ever perfect. But having a plan puts the nonprofit in a better place should they encounter a disruption, because you’ve done most of the thinking.

It’s just like military war games. It’s very rare for any actual battle or war to go exactly as planned, but at least you have a starting point and possible immediate action steps you can implement.

It could also happen that an organization misses a scenario, but if you have related ones, you can use it as a starting point. Plus, during the stress testing, you will be able to see if your solution can truly provide you with real-time budgeting, planning, and forecasting, so you can adjust quickly to this new situation.

Ultimately, your nonprofit may need to address multiple crises simultaneously. To address this situation, we suggest that you include offsetting actions in your assumptions.

For example, if your assumptions include grant revenue reductions, which it should, also include in your formulas how the percentage reduction would be balanced out. You might, to extend this example, set up a formula that dynamically includes a 5% reduction in the supplies and a 5% reduction in travel when a 10% reduction in grant revenue is specified. 

Throughout the process, the biggest piece of advice we can provide is to keep your eyes on your mission. This should be your “North Star” of what to ask, what to keep, what to cut, and where to focus your time and efforts.

Developing Scenario Action Plans

Now that you know the considerations and issues for developing your “what-if” scenarios and your response to them, it is time to begin developing them. The process is not as hard as it might look. We can attest to that. The process we recommend is the one we use internally, and it is broken into four simple steps:

1. Design: Led by the key decision makers, including the board and the CEO, you need to first be clear about the purposes of the plan and how it will be: Is it for your strategic planning (i.e., growth or retraction), crisis response, and/or to foster other types of change? You also need to determine the timeline you will look back on as well as project out in the scenarios (it could be 1, 3, or more years). You will then need to collect the data – everything from the financials, budgets, and types and sources of revenue to your expenses, cash reserves, staffing, program data, and more. Finally, you need to identify the base case (your current state or the most likely to occur), worst case, best case, and anything in between for all your programs.
2. Build: Using spreadsheets (not recommended) or a financial planning solution such as Martus (highly recommended), you can then build your plan templates. The format (revenues, expenses, non-operating activities, cash balances, receivables, and payables/liabilities) should be similar to your financial statements but detailed enough to highlight the key trigger points. Create separate sheets/models with the revenue & expense (i.e., profit/loss projection) and cash flow forecast for at least scenarios (base, worst case, and best case) and identify your assumptions, which can include the likelihood of grants being renewed, the award levels of new grants, changes in event revenue, payroll adjustments, and personnel changes, among others. Of course, be sure to document your assumptions, where the numbers came from, who provided input, and the revision dates.
3. Model: The assumptions mentioned above should serve as the basis, updating them as needed, and have your template show your net surplus/deficit, your ending cash balance, and cash reserve balance (answering the question of when you will run out of cash). Be sure to document the process, including a summary for each scenario.
4. Deploy: Finally, you should create dashboards for visual summaries of your models. Include graphs of revenues vs. expenses, a trend line for cash balances, and recommendations on next steps and/or key actions to be taken. Monitor and update as needed.

Keep Focused on Your Mission

As you can see, throughout this process, the task is not as daunting as it might look at first. This might be different than what you’ve done in the past.

Historically, finance is just seen as this department that’s sitting in the back room and are just the number crunchers. But the finance department is really a service department of the organization, and its customers are every other individual in that organization working within it as well as to those external to it, such as your funders, vendors, and constituents you serve. Everyone is your customer.

As a result, the CFO in nonprofits is taking on a more strategic responsibility. Many in the finance departments don’t yet see it. They still think that if everything is reconciled, they’re doing their jobs. They’re not seeing that they’re also a customer service department. But if they adopt that mindset, there would be a sea change for the organization.

You should also keep in mind that you are not alone in creating the financial scenario plans and in the stress testing, nor in driving any needed changes in your finance department. JMT’s Client Accounting Advising Services can guide you through these steps.