performance-metrics

Board Performance & Metrics

Key Stages of Building a Financial Model for NFP Organisations


Published: March 7, 2022

Read Time: 6 minutes

Building financial model

Financial modelling is one of the most important tools a non-profit organisation can have under its belt. It can help in the planning of short and long-term strategies, to identify areas for improvement, and even to adjust the entire business model.

The board should be part of building a financial model, but it must cooperate with other key decision-makers in the organisation to ensure everyone’s needs are being met.

Based on a recent webinar hosted by Daniel Cadart, CFO of Cadart Financial Control, here is a way to approach financial modelling, the key numbers needed to create a more realistic forecast, and what to look for in financial modelling software.

Begin with negotiations among decision-makers

Financial modelling begins with assembling a team of decision-makers representing different areas of the business. Some will be more interested in long-term forecasts, while others are responsible for reporting the short-term numbers.

Building a financial model requires collaboration between representatives from three key parts of the organisation: the board, the executive, and the operations team. Each of these parties uses the financial model for differing objectives. More often than not, they have different agendas and priorities based on their role within the organisation, which need to be reflected when compiling the financial model.

Here’s how it typically breaks down:

  1. The board is most concerned with the highest-level data, and with projected performance. It uses financial modelling to assess the organisation’s likely progression over the next few years, and to define the business model.
  2. The executive, in partnership with the board, determines the strategy for the organisation. They need a financial model that predicts the organisation’s performance in the current and next financial year. They need to be able to identify areas of the operation that are experiencing issues: for example, revenue streams that aren’t generating enough income, funding shortfalls, unbudgeted expenses, etc.
  3. The operations team decides how to put the strategy into practice on a day-to-day basis. They use the financial model to track month-to-month forecasts and real results.

In order to produce the most practical financial model for the organisation, all of these parties need to be brought onto the same page. Treat these initial meetings as a negotiation: Everyone has the opportunity to lay out their respective needs and wants, and these are factored in as best as can be done while constructing the model.

In terms of the specific representatives that are drafted in to work on the financial model, it primarily depends on expertise available. This is particularly true for the operations team: Go by skill set rather than job title. Usually the treasurer or finance committee will represent the board, and usually the CFO and possibly also the CEO provide input from the executive team. However, that may change if someone else on the team has more experience compiling financial models.

A word of warning: Be careful not to give any one person sole ownership of the financial modelling. If someone is controlling the financials without any oversight, they’re effectively dictating the budget and strategy, which is not the point of financial modelling.

Choosing a financial modelling tool to work with

It can be useful to be able to share the financial model with multiple parties remotely. These days there are many different types of software that make financial modelling easier than ever and allow adjustments to be made in real-time.

It doesn’t need to be expensive, Microsoft Excel is a perfectly adequate financial modelling tool — in the right hands at least. Its greatest strength is that it’s incredibly flexible: Changing the value of one cell can instantly alter calculations across the spreadsheet. However, that’s exactly why some people don’t like to use Excel. If you don’t know how to protect individual formulae or back up the sheets, there is a risk of losing the original version. 

Another software that is based on Excel’s methods is Modano. It has more controls built in, to avoid these issues. It is less flexible, but also potentially less vulnerable to data loss.

These are just two examples. The most important thing is to find software that everyone feels comfortable working with, which allows the right balance of flexibility and guardrails.

Always calculate the underlying profit

The most helpful financial models are not the ones that show all the good things going up and to the right. The most critical thing needed from a financial model is a healthy dose of reality — promising or alarming.

The aim of a financial modelling tool is to predict what the organisation’s finances will look like as accurately as possible. It is important to build it in a way that gives the most reliable data.

That means differentiating between income the organisation can consistently rely on, and income that is most likely an anomaly. Failing to do this can mean forecasts are based on information that won’t eventuate in the long term, which can result in misunderstandings of the real data and overspending.

In addition to recording total revenue in the model, it is important to include an underlying operational financial performance number. This is a range that gets as close as possible to what the organisation is actually making, excluding any unexpected or one-off incomes. Government funding provided as support during COVID-19 is a great recent example of this. Your organisation may have received some grants related to the pandemic response, but factoring them into the organisation’s total revenue may artificially inflate the forecasts.

The foundational lesson is that financial modelling is not supposed to be a pitch. It is an ongoing report that will help you build an organisation with the strong numbers you want to see.

How to use the financial model

Once historical data has been entered, you’ll have monthly, quarterly, annual and multi-year forecasts. Every quarter, replace the forecasted data with the actual data. This should adjust your annual forecasts. It’s enough to give you a more accurate idea of where you’re headed, without being too prescriptive.

Your financial model can help you make several key changes straight away:

Tactical reforecasting and strategic planning

First, the executive and operations teams should look at the areas where quick improvements can be made. For example, updating pricing, renegotiating contracts with suppliers, and making sure staff are being deployed effectively. If there are still issues after that, the board can add more strategic changes: restructuring, expanding services, or moving to new markets, for example.

This is a very useful benefit of financial modelling: It can quickly highlight overlooked issues in areas that are relatively easy to fix. 

Business model review

If none of these immediate changes work, the next phase would be adjusting the business model to move the organisation’s numbers in the right direction. Your financial model should make it easier to spot opportunities to easily save or make money for your organisation. If you make those changes and still don’t see results, consider hiring a consultant to tackle your business model. Sometimes you need someone with objective distance to look at what you’re doing and identify what needs to change.

Financial models are never completely finished. The point is to plug in your numbers, see what comes out, and whether you can improve. Invest upfront and you’ll see the results.

This article is based on a webinar hosted by Daniel Cadart, CFO at Cadart Financial Control. Watch the entire presentation here. This article is general in nature and does not constitute professional advice. Better Boards recommends that the reader contact Daniel Cadart directly for more information, or seek their own professional guidance in relation to their own circumstances.

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Better Boards connects the leaders of Australasian non-profit organisations to the knowledge and networks necessary to grow and develop their leadership skills and build a strong governance framework for their organisation.

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