Multiyear planning can help keep a nonprofit close to its community

Published in the June 22, 2007 edition of Columbus Business First

Multiyear financial planning is an invaluable tool to maintain a tight linkage between a nonprofit’s mission and the shifting needs of the community.  Unfortunately, too few organizations use this tool because they mischaracterize it as an error-prone and futile effort to predict the future.

This mischaracterization is understandable.  Everyday we see weather forecasts for rain that never arrives, Wall Street forecasts of earnings that never materialize, and announcements of new products that don’t arrive as promised. 

The value of a long-term plan, however, does not lie in its forecasting prowess.  Rather, its value comes from providing a way to systematically and consistently: 

• Consider future scenarios confronting the organization and the community.
• Examine the consequences of each scenario.
• Illustrate the cumulative effects of key decisions.
• Determine the best responses to prepare for the opportunities and the risks that appear most critical in the coming years.

Limitations of Forecasts

Let’s first set some realistic expectations.  An intelligent forecast does not build its credibility on being right about what will happen.  If accurate prediction of the future were a prerequisite for planning, none of us would compile to-do lists or pick the best time for a summer vacation. 

The obvious reason we plan is to identify what events need to occur and in what order so that we can prepare for an outcome we want.  The reasons for planning in an organization are not so different.

The most important definition of a good forecast is that it tells a story or suggests a future that makes sense and is consistent with all the other information you have available. 

I spent many years building statistical forecasting models and I learned that neither data nor statistics should ever override common sense, judgment, or experience.  The most basic test of a forecast is not its complexity or sophistication, but whether it passes this smell test:  does it make sense, does it inform policy-making, and do its implications fit with what you know? 

Left Behind by Future

One of the keys to staying relevant as a nonprofit organization is to stay in touch with the changing needs of the community.  Remember that tax-exemption was created to encourage organizations to address important needs of the community that the for-profit, market-driven economy couldn’t or wouldn’t address.  That critical link between community need and mission cannot be taken for granted; community needs are continually changing and nonprofits must keep up with those changes if they are to remain pertinent.

A multiyear plan starts by examining the major drivers of change in the community.  This effort leads to a strategic view of where the community is headed.  

Surely, a well-managed nonprofit already has a clear idea of how its programs address the needs of the community.  It is a simple step then to ask how well its programs will continue to address community need if things change. 

It is highly likely that asking this question will prompt ideas for ways in which the nonprofit could respond.  These ideas are the beginning of a multiyear plan.

Next the planning process takes each idea and addresses these questions:

• How does it advance the nonprofit’s priorities?
• What outcome is expected and how will it be measured?
• How is the outcome to be reached, when and by whom?
• How will the community benefit after implementation?

Only after an idea survives the gauntlet of these questions does the planning process get into the financial questions of personnel, costs, revenue, and overall affordability.  These financial questions raise important questions: 

• Do we change the business model?
• Do we change our approach to fundraising?
• Do we change our cost structure?
• Should we grow, shrink, merge?

The result of these efforts is a multiyear plan that represents the best thinking about what the nonprofit needs to do next.  The budget is the first step in that plan. 

Oh yes, a forecast played a part in answering all these questions.  But it wasn’t the forecast that was important, rather its role was as a tool to ensure the strategic Q&A was internally consistent and incorporated the implications of each option. 

The only way to keep up with change is to have a process to evaluate it and develop responsive strategies. 

No one has yet discovered a better tool for this than multiyear planning.  It helps you keep your eye on the strategic ball amid the noise and distractions of daily operations. 

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.”  www.proctorconsulting.org

Copyright 2007. Reprinted with permission, Business First of Columbus Inc.