By Dipty Jain, Principal
With fears still running high about what the medium and long-term implications of Brexit are, we should take this time to reflect upon best practices in planning for uncertainty. The referendum serves as a reminder that while we cannot predict the future, we should be prepared to act.
And scenario planning— developing responses to account for uncertainties—should be a regular practice for organizations.
Scenario planning shouldn’t only happen to respond to crises, or unknown unknowns. All nonprofit organizations also face situations in which there are known unknowns, such as the level of revenue raised at a fundraiser or expenses of a building repair. This is why we consider scenario planning a key piece of effective financial management: it lays out an action plan to mitigate the risk and leverage the opportunities of future events on revenues, expenses, and operations.
Here are three strategies to incorporate into your organization in developing a successful scenario plan:
- Revenue: the Known Unknown
No matter how much effort goes into reviewing your expected revenues for the year, there will always be unknowns. The types of things that can affect revenue are the nonrenewal of a multi-year grant, changes in revenue from public sources as government budgets shrink (or grow!), and the unpredictability of individual giving from year to year. Scenario planning can help prompt an analysis of the likelihood of funds from particular sources based on historical trends and help develop responses to future revenue fluctuations.
- Expenses: Budgeting for the Unknown
Expense budgets should reflect a planned and strategic use of resources. Organizations don’t operate in static environments so fixed expense budgets aren’t really realistic nor do they maximize opportunities. Foreseeable expenses, like increasing personnel costs to allow for promotions, and unforeseeable expenses, like litigation expense, impact budget forecasts in different ways. Scenario planning can help build responses to both situations, such as a compensation increase budget or contingency budget, or building organizational reserves to mitigate the effects of an unforeseeable event.
- Leadership: Communicate Knowns and Unknowns
Prioritizing effective and transparent leadership communication is key. It’s important to have a plan to respond quickly to unforeseen events and organizations need high-functioning leadership teams that have a role in developing the scenario plans and can make decisions when the time comes. Having a decision making process and an empowered and engaged leadership team will help identify red flags and potential opportunities early and eliminate bottlenecks in execution under any scenario. For example, if your biggest funder changed its program focus, are you confident that your organization’s leadership could come together as a team and identify steps to take to tackle the challenge?
Events like Brexit that are unexpected can lead to uncertainty and discomfort about our own financial situation. By incorporating scenario planning on a regular basis, nonprofit organizations will be more resilient and can carry on normal operations in the face of uncertainty.