Why Stress Testing a Nonprofit’s 2023 Budget Is Important
Updated: Jun 9
This is a guest blog by Shannon Flynn from ReHack Magazine
Planning, organizing, and budgeting for the upcoming year require an impressive amount of patience and research. Proper preparation can take a nonprofit to astronomical heights of success and fundraising, but plans are always based on assumptions about the future.
Nonprofits can garner a pretty good idea of the upcoming year by studying past funds and general economic and societal forecasts, but they can’t account for everything. External forces outside the organizer’s control, like interest, inflation, and energy cost, may spike and completely alter the budget.
For example, the 2008 economic recession was a massive setback for many nonprofits and other institutions who struggled with diminishing revenue models alongside a growing need for community aid. Now, the world faces a new normal after the COVID-19 pandemic and subsequent economic shifts.
In 2023, organizations must stress test the nonprofit budget process to create resilient contingency plans. This will strengthen their reserves and make them better able to help their recipients.
What Is Stress Testing?
The stress-testing methodology monitors an institution’s ability to react and adapt to unfavorable conditions. Studying the efficiency of contingency plans and the overall effectiveness of the budget in sudden change or crisis helps the organization respond more quickly in times of real danger. It can also guide budgets for the upcoming years.
Conducting Sensitivity Analysis
Sensitivity analysis is all about evaluating key internal and external factors. Internal factors like hiring levels, relocation or new campaigns are all under the nonprofit’s control and probably would not occur without prior knowledge. Instead, it is more helpful to test external stressors like pauses in the supply chain or natural disasters affecting operations.
Evaluating the nonprofit's sensitivity to each factor is critical to planning contingency operations. For example, a spike in the cost of oil would not alter the 2023 budget for a nonprofit with a majority-online presence.
Selecting Stress-Testing Software
With these critical factors in mind, a nonprofit could utilize tracking software to stay updated and ready to react to their stressors. Larger nonprofit budget breakdowns may span departments, teams, and countries, so it should select a tool that fosters collaboration and customization.
The forecasting of key sensitive factors is also crucial. Ensure that the desired stress-testing tools forecast trends and changes with customizable settings and views to test different scenarios.
The ideal software tool will allow an institution to keep its analytics and reports on one dashboard and dig deeper into custom “what-if” views or forecasts.
Considering “What-if” Planning
After selecting stress testing software to monitor and play with sensitive factors, nonprofits can experiment with “what-if” scenarios and build their responses. For example, does the budget account for money to deal with burst water pipes? What might happen if a federal grant is eliminated or a key investor is lost?
Nonprofits should test multiple variables at once. Often the real world does not wait for one crisis to be over for another to occur.
Organizers can use these answers to arm their team with knowledge and confidence about their budget’s adaptability. There is no point in the year where leaders cannot alter their budget allocation, either. Shifting focus when other areas need development clearly indicates that the nonprofit is well-prepared for any eventuality.
Common Assessments for Nonprofits
A nearly endless array of events may occur and shake up 2023 budget plans, but nonprofits should consider testing a shift in institutional values or public policy. What are the moral battlegrounds where compromise is not an option? Will it accept federal funds that exclude racial or cultural groups?
Additionally, will they accept support from public figures whose missions do not rely on science-backed evidence? If a change in values occurs, the institution must be prepared to draw hard lines in the policy.
A strategy may also shift with large-scale societal events. During tumultuous times, some nonprofits need to increase their direct aid to the community they serve. If such a monumental change in the way of life occurs, will the institution be willing and able to pivot? Can it plan for various nonprofit budget categories?
Preparing for a Better Future
Analyze well and often. Tracking those key factors will only be as useful if they are monitored closely, and testing gives the institution multiple paths to explore. It’s easier to face a sudden change in funds or costs when armed with various tools, metrics and options.
Being fully equipped for change means more opportunities to give back and explore the community good that nonprofit organizations share worldwide.