If your charity has a lean finance team then forecasting may seem like another task in a long list, but there are some clear benefits why you may want to look at it.
Whether it helps control, shows up future opportunities or gives the trustees more confidence, forecasting is a useful tool that any charity can make use of. You really don’t need extra software to make it a reality, a simple spreadsheet will do, especially if you use the latest finance software.
Read on to learn what we see as the most important benefits of financial forecasting for charities.
Budgeting vs forecasting
Forecasting can sometimes be used interchangeably with budgeting, but to be clear, a budget is what you want to happen and generally speaking you’ll do this before the start of the financial year. You wouldn’t expect it to change and you generally report your monthly, quarterly or annual results against it.
This means that when you set your budget at the start of the year, it remains fixed, whatever happens.
However, a forecast is an ongoing task and can change, dependent upon new information and conditions.
For example, you may set your budget at the start of your financial year (let’s imagine this is April) and this is based on the aims and targets set by your trustees.
You’ve assessed that your income will be £500,000 and your expenses will be £495,000. This will be your budget.
As you go through the months you report your actual results against this and all is well until September when a local government agency asks you to do extra work to the value of £250,000.
This is such a sea change in your income that it puts your budget significantly out of alignment and reporting against it becomes less useful - hence why a forecast can help you predict your income.
Your forecast is based on your results in the year to date but includes the remaining six months with your assessment of what things will look like with the new income.
Now your trustees can see what they expected was going to happen, what they expect will happen and your monthly results against both of these.
If you have a particularly fluctuating income or expense stream then you may want to forecast every quarter or month.
A cash flow forecast is important for every organisation and shows what your cash in the bank will look like. Remember that cash is completely different from profit (or surplus) so it’s a good idea to have a separate cash flow forecast too.
The benefits of forecasting
Forecasts can vary in terms of complexity and the time and resource needed to complete them so there needs to be a good reason for committing to the process.
Here are our top benefits to forecasting for charities.
1. Avoid cashflow crises
The last thing your company needs is to run out of cash to pay its workers or creditors.
As Kids Company found out, as soon as bad news hits the press, whether it is warranted or not, then funders tend to get nervous so having an accurate cash flow forecast is a must.
2. Give trustees confidence
Trustees have a legal duty to ensure that the charity is operating in a responsible manner and part of this to do with finances.
The trustees of your charity must have confidence that the books are in good order, that the charity has enough money to carry on working and there will be enough cash in the bank to pay creditors in the future.A comprehensive forecast helps give them the confidence they need.
3. It improves controls
The process of producing a forecast helps you understand where your money is coming from and where it is going.
The same can be said of a budget, but if things change then with a budget you’ll only find out about it long after the fact.
With a regular forecasting process, you’ll see how things are changing ahead of time and you’ll be able to put in controls that will avoid any nasty surprises.
4. It improves your bookkeeping
The foundation of your forecast is going to be your finance system and if things are being posted into the wrong period or incorrect accounts then most of the time you’ll only find this out when it comes to year-end.
If you have a regular forecast refresh you’ll instantly see where accounts are looking odd with too much in the way of costs or items missing altogether.
5. It improves your budgeting
In some organisations, a budget is produced once a year and not checked from one month to the next.
When it comes time to see how you did then it doesn’t seem too important if there’s little alignment with the initial budgeting, but if you are doing a monthly or quarterly forecast you’ll be much closer to the action.
It will be completely clear where your assumptions were out or where you missed things altogether but the good news is that with a regular forecast you’ll know in time to do something about it.
6. It highlights opportunities
If you see that your forecast income is going to be much better than you expected you’ll be able to release more cash to ultimately help your beneficiaries.
A forecast may also show you areas where you are spending more than you budgeted, in which case you have the opportunity to make a change before the overspend becomes serious.
7. Gives you time
This is the most important benefit that a forecast can give your charity - the gift of time.
Let’s think of our imaginary charity with its budgeted income of £500,000.
What happens if it turns out to only be £400,000?
In most cases, the shortfall will only become apparent when the bank account runs dry or the annual accounts are produced; in other words long after it is possible to do anything about it.
But if you are forecasting monthly then the shortfall will become apparent almost immediately, giving you time to alert the trustees and giving them time to make strategic changes.
Most problems are solvable if you have the time to put measures in place and forecasts give you that time.
Forecasting cashflow helps planning
Having that insight into your charity’s financial performance enables you to plan your future programmes and initiatives which ultimately help your beneficiaries.
However successful forecasting also lies in having a payment system that gives you visibility into your income, so you know when and how much is going to come in.
Similarly the payment methods that are used in your not for profit can make a significant difference to your planning and forecasting, for example, recurring payments through Direct Debit gives you confidence, reliability and regularity in your cashflow.
Producing monthly forecasts is going to be easy or quick, especially if you are stretched in terms of finance resources.
It will take time and you may need to learn how to extract relevant data from your systems however, it’s certainly worth it for senior charity leadership and trustees.