Part 5 of a 6-part blog series.
Too often associations focus intently on their mission and vision while largely overlooking finances and operations until a crisis looms.
But did you know financial modeling can help you more clearly understand both financial and nonfinancial issues? It’s an invaluable management tool that is key to delivering the programs, services, and products that are needed in your market.
Today, financial modeling has become even easier and more illuminating with predictive analytics. You can now translate historical data, current conditions, and assumptions about market behavior into numerical predictions.
These predictive models, in turn, can help you see the impact of different events and scenarios to support better decision-making.
What is financial modeling?
Financial modeling gives you a numerical representation of your internal operations and external influencers in the past, present, and forecasted future. It essentially allows you to calculate (and explain) the impact of a future event or decision.
But there’s no one size fits all when modeling. Every industry sector, organization, executive, and investor is unique so your financial model needs to be customized accordingly. You also have to consider who you’re building your model for (aka your audience) and how they prefer to consume information.
Is it to be used by your membership department? If so, they may care about members more than revenue or dollar signs. They probably also care about member engagement and how the model tracks it and determines the elements that resonate. In this instance, you’d want your model to include operational data as well as revenue data.
On the other hand, if your audience is your board or finance committee, you may want to hone in on funding and revenue data.
Why is financial modeling important for associations?
Identifying key economic drivers
Financial modeling allows you to boil your whole organization down to the key programs and drivers that matter most from a financial perspective and other perspectives as well. At the same time, it also helps get people in your organization on the same page and “speaking the same language” when it comes to key economic drivers.
Building a (financially) sustainable organization
A financial model is not a budget; rather it allows you to play out different scenarios and see what the impact is. By quantifying (and then validating) your financial model, you can determine whether you can turn your vision into an economically viable organization.
Building out different scenarios of what could happen allows you to prepare for future outcomes, especially if things don’t go as planned. Planning for worst-case scenarios helps you anticipate potential cash flow and funding needs. It also helps keep everyone informed of how your organization is performing compared to financial targets and benchmarks.
Finance modeling is a critical part of the fundraising process. Investors and donors almost always ask for a financial plan when you engage them to raise funding. Some typically want more details than others. But either way, building a real model allows you to provide both high-level and detailed data.
Plus, calculating exactly how much funding you need and when will surely help you plan your fundraising strategy. It can also help you engage potential investors in a more meaningful conversation using charts, graphs, and data visualization rather than simply presenting an income statement or balance sheet. Having a model to say when an event might happen and how it will impact your organization is a sure-fire way to instill confidence.
Financial modeling can also help you benchmark and manage your budget projections, assumptions, and current finances. This can open a dialogue about the appropriate way to value economic drivers and the effectiveness of your fundraising approaches, potentially prompting you to re-formulate your strategy.
It’s important to note that a financial model is only as good as the inputs that go into it. But thankfully with predictive analytics, you can make your model more accurate than ever.
Related Article>> Masterful Metrics: 5 Steps for Creating Metrics that Retain More Association Members
How does predictive analytics help associations with financial models?
Building a financial model today is not really an issue considering the countless templates available online. The REAL problem though is actually doing the modeling and crunching the numbers.
For example, how do you forecast membership? What is the market size of your target audiences? And how much should you spend on events? Financial forecasting with predictive analytics is a great way to get these numbers and enable the predictive modeling of future scenarios.
Here are some of the ways in which predictive financial modeling can help your association:
- Model potential growth from internal factors (e.g. shift in strategy) and external factors (e.g. change in policy or compliance regulations).
- Benchmark and project your financial performance and organizational value.
- Estimate the costs and financial value of a proposed project, program, or event.
- Decide on budgets and allocate resources.
If you wanted to get even more specific, you could even use financial modeling software to project peak funding needs and investment opportunities down to the week or even day.
In reality, your predictive model could act like a very detailed checkbook in which funding, expenditures, interests, and different investments—vendor by vendor, line item by line item—can be projected and continually compared to your historical and current performance.
Typically, though, you’d want to err on the side of caution for anticipated expenses and projected availability of funds when doing such predictive modeling.
Getting into the Rhythm of Financial Modeling
A financial model is not something you create once. Rather, it should be built into the rhythm of your organization and then rolled forward on a weekly or monthly basis.
Best-case scenario, your management team should use this model in real-time at every management meeting. That way you can model out the effect and strategy behind trying different inititiatives.
Ready to get a pulse on current and future cash flow and operations? Browse our comprehensive new guide The Association Retention Playbook: The 5-Step DIY Membership Retention Strategy and Workbook to start planning for better organizational health.