This is the fourth blog post in a series by Hal Shelton, SCORE small business mentor and author of The Secrets to Writing a Successful Business Plan. In the previous three installments, we looked at “4 Sections Every Business Plan Must Have (and Why They’re Important),” “Why You Need a Business Plan (and the Best Style for You),” and “When Is a Good Time to Review and Renew Your Business Plan?” This month, we discuss creating a business plan for a nonprofit.
You need a business plan for the start-up or expansion of a nonprofit for the same reasons you do for a for-profit enterprise.
It’s often said that nonprofits should be run like for-profit businesses. Additionally, you need to make the case for your mission, explain why donors and grantors should provide funding, and seek a qualified board of directors (sometimes called board of trustees).
In fact, since a nonprofit business plan contains more information about mission and vision, it is commonly referred to as a strategic plan.
Do you have a “pure” nonprofit or one that is a mix of for-profit and nonprofit activities? If you have a mix, then you probably need two business plans: one for each part of the business. AARP, for example, has both a for-profit business where it sells insurance and products, and a nonprofit business to advocate for people over 50.
Marketing and Development for Nonprofits
In a nonprofit business plan, the marketing section is expanded to a marketing and development section. Marketing addresses the nonprofit’s target market, and all the analysis of identifying and reaching out to these customers applies equally to for-profits and nonprofits.
Nonprofits also have a second set of customers — those individuals or entities who will be making contributions or volunteering their time and/or services. Nonprofits usually call this fund-raising and friend-raising development.
In your strategic plan, you should include a subsection under marketing and development addressing how you will achieve funding levels to support your efforts to carry out your mission.
When creating the marketing and development section, be mindful of the metrics used to describe activities and success. Unlike most for-profit companies where success is measured in monetary terms, in a nonprofit, success is achieved if you have sufficient financial resources to carry out your mission and the mission’s objectives are accomplished.
Most nonprofits collect data about the “inputs” — how many resources like staffing, purchases, machines, and number of offices were used to achieve the objectives. They also collect information about the “outputs” — how many items were made and sold, reports prepared, patients seen, speeches given, and so forth.
But what warms the hearts and minds of potential donors are the “outcomes.” If the nonprofit is a medical clinic, examples of outcomes would be how many lives were saved, how many families were kept intact, and how many days were not lost at work.
Inputs and outputs are usually gathered from the organization’s accounting system or other readily collected data. Outcomes usually belong to the customer — the people or organizations the nonprofit is helping — and are often only available by survey.
Financial Reporting for Nonprofits
The key difference between for-profits and nonprofits is in the layout and names of the financial statements.
There are several nuances in accounting rules between for-profit and nonprofits, which your accountant can help you with. Be sure to use an accountant with nonprofit experience and other nonprofit clients.
First, what we refer to as the for-profit balance sheet becomes the nonprofit statement of financial position. Since a nonprofit has no stockholders or investors, the stockholders’ equity section becomes the net assets section.
The net assets section has three components capturing the nature of any donations classified as “unrestricted” (nonprofit can use funds for any purpose) “temporarily restricted” (funds are for a specific project, activity or time period) or “permanently restricted” (donated funds cannot be utilized by the nonprofit).
Here is a visual comparison of a for-profit balance sheet and a nonprofit statement of financial position:
Second, since the purpose of a nonprofit is mission and not income, the for-profit income statement becomes the nonprofit statement of activities, and its bottom line is net assets rather than net profit or net income.
If you want more information on how to plan a nonprofit, there is a wealth of information online. Here are a few of my favorite:
- The SCORE Non-Profit Planning Guide
- Nonprofit Resources from the IRS
- BoardSource training and education
Two especially worth reading are:
- Ten Basic Responsibilities of Nonprofit Boards
- The Nonprofit Board Answer Book: A Practical Guide for Board Members and Chief Executives.
Also, check out Guide Star for more information about Form 990 (“Return of Organization Exempt From Income Tax”— nonprofits must file a tax return but owe no money). This nonprofit organization gathers and publicizes information about other nonprofit organizations.
- A nonprofit needs a business plan for the same reasons a for-profit business does.
- A nonprofit business plan is often called a strategic plan since it is largely focused on mission and vision.
- While there are similarities between for-profit and nonprofit financial statements, there are important differences.
- Determine if your organization is solely a nonprofit or a combination of nonprofit and for-profit
- Create your marketing and development section focusing on your two sets of customers.
- Develop your financial statements recognizing the similarities and differences in comparison to traditional for-profit financial statements.
Have questions about creating a business plan for your nonprofit? Post them in the comments below.
About the author: Hal Shelton’s business planning skills were developed as a certified SCORE small business mentor, corporate executive, nonprofit board member, early-stage company investor, and author of The Secrets to Writing a Successful Business Plan: A Pro Shares a Step-by Step Guide to Creating a Plan That Gets Results. Suggestions for additional topics are welcome; email Constant Contact or Hal directly from his website: www.secretsofbusinessplans.com.