Nonprofit organizations must create financial plans just like their for-profit counterparts. Since nonprofits rely to a great extent on donations and grants for their income, nonprofit financial planners can find it more difficult to accurately plan for future income. Common difficulties with financial planning in a nonprofit organization include the unpredictability of grant funding and the effects of economic shifts.
Nonprofit organizations submit grant proposals to organizations in a competitive bid to receive funding. Because of the competitive nature of grant-writing, grant money is highly unpredictable. An organization may receive significantly more money than it planned, or it may receive none at all from grants during the year. This can make planning difficult for nonprofits, who can set goals for dollar amounts of grant funding but cannot accurately predict where the money will come from and exactly how much it will be.
Donations from individuals and organizations can quickly drop in times of economic uncertainty. Nonprofits can predict next year's income using previous years as a starting point, but a dramatic shift in the economy can cause the organization to drastically miss its income targets. This, in turn, can affect the scope of the organization's impact in the area of need it serves. Organizations can attempt to keep income levels steady by reducing costs or employing innovative fundraising tactics in difficult economic times.
Exchange Rate Effects
A large number of nonprofits operate in nations other than their home country. For these organizations, shifts in international currency exchange rates can cause service and program costs to vary. Undesirable shifts can cause travel costs, lodging expenses and a range of other costs to increase. Exchange rates can be difficult to predict over the long term, and financial planners in nonprofit organizations must take all possibilities into consideration.
Nonprofit organizations can plan and predict their service expenses to a certain degree, but when an organization responds to a large international crisis it can incur significant, unplanned expenses. After incurring these expenses, the organization must still find ways to fund the services it has already committed to.
The 2010 disaster in Haiti serves as an example of this fact; several large international charities spent millions of dollars, outside of their normal operating budget, on relief efforts. Many of these organizations, such as the Red Cross, employed quickly planned, innovative fundraising methods to address the new expenses.