Let’s say your nonprofit organization is at a crossroads. There are many questions you may be considering. Should your organization invest in technology or additional personnel to fuel programmatic growth or revenue diversification? Should it raise annual dues to its members? Should your organization consider a strategic partnership? And how can this information be communicated to the board of directors and other stakeholders?
Building a scenario model is a valuable approach that should be considered in making these decisions. A scenario model is a financial model that projects revenue and expenses over a period based on a pre-defined set of assumptions. These models can be built so that they are easily “flexed” or able to accommodate various scenarios. For example, if an organization is considering whether to invest in technology to educate or to provide certifications to its members, multiple versions of the model can be prepared (e.g., “Aggressive Case,” “Realistic Case,” or “Conservative Case”), varying only the “relevant costs” in each case. From this modeling, decision makers can gain a clear picture of the organization’s path forward, and decisions can be made.
The starting point or “baseline” for a good scenario model is always the organization’s operating budget. It is important to understand that a scenario model is not an operating budget; rather, it is derived from an operating budget, as assumptions are included that are not necessarily part of the operating budget. From there, budget scenarios can be “flexed” to build the financial scenario. Another key difference is that while an operating budget is usually required within an organization’s bylaws to be presented and approved by various board committees and ultimately its board of directors, there is no such requirement for a scenario model. While it may be prudent for the organization’s leadership to share the scenarios with the finance committee or the board itself, there is no requirement from a governance standpoint. The scenario model can be thought of as a “sail” that can be adjusted each year to “steer the boat” in the direction that it needs to go (operating budget).
For example, let’s say your organization has a three-year operating budget developed that assumes 5% growth in annual membership dues. However, rising program and administrative costs continue to generate operating deficits. Management may very well decide to embark upon revenue diversification initiatives, such as additional program fees, credentialing, conference expansion, etc., while also initiating cost reduction measures and calculated investments to generate the additional revenue. These initiatives can be “modeled” within the scenario model, and as year one of the operating budget is completed, the scenario model can be adjusted for year two based on what the organization was able to accomplish in year one, with the resulting output forming the basis for the year two operating budget, and so on.
Finally, Excel is an excellent tool for constructing a scenario model; however, several software applications allow for forecasting and scenario modeling that may be considered.
Need Help Getting Started?
If you’re ready to explore how scenario modeling can strengthen your nonprofit’s decision-making, our CBIZ nonprofit professionals can help you get started. Contact us today to discuss building a model tailored to your organization’s goals.
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