- Nonprofit scenario planning means building two or three versions of the budget under different assumptions, so the finance committee knows in advance how it would respond.
- For charitable nonprofits, the variables that matter most are individual giving, foundation grants, government funding, program fees, and demand for services, and each behaves differently under pressure.
- A downside scenario is only useful if it leads to a decision: which expenses flex, which reserve tier covers the gap, and who is authorized to approve a draw.
- Scenarios become real in the reserve tiers and the Investment Policy Statement: a projected cash gap in month four should change how the operating reserve is sized and held.
- Scenario planning works best as a standing part of the finance committee’s calendar, not a one-time exercise.
The Case for Planning Beyond the Approved Budget
Most nonprofit budgets are approved months before the year they govern begins, and the assumptions behind them are already aging by the time the first quarter closes. A major donor’s circumstances change. A government contract is renewed late. Demand for a program rises faster than the fee revenue that supports it. None of these events is unusual. Organizations that handle these events well are usually the ones whose finance committee has already decided how it would respond.
That is the purpose of nonprofit scenario planning. It is not a forecast of what will happen, but a structured way of deciding in advance how your organization would respond if revenue came in lower, costs came in higher, or both happened at once. This article covers what scenario planning is, how to build scenarios around the revenue lines charitable nonprofits actually depend on, and how those scenarios should shape your reserve strategy and your Investment Policy Statement.
This article is written for charitable nonprofits. Membership associations have a different revenue model and are covered in a companion article on association financial strategy for a soft year.
What Is Scenario Planning for a Nonprofit?
Scenario planning for a nonprofit is the practice of building two or three versions of the annual budget, each based on a different set of assumptions about revenue, costs, and demand, so that the board and finance committee know in advance how the organization would respond under each. The base case is the approved budget. A downside case assumes a realistic combination of setbacks. A severe case assumes the setbacks arrive together.
In simple terms, the budget says what you expect. The scenarios say what you would do if you are wrong.
The exercise is valuable because it separates two decisions that often get tangled together during a crisis: what happened, and what to do about it. A finance committee that has already agreed on which expenses can flex, which reserve tier covers a shortfall, and who approves the draw can act in one meeting. The scenarios do not need to be elaborate. Three columns in a spreadsheet, with the assumptions written beside them, is often enough to change the quality of the conversation, and it is the most useful form of contingency planning most nonprofits can do.
In simple terms, the budget says what you expect. The scenarios say what you would do if you are wrong.
Why Is Nonprofit Revenue Hard to Predict?
Charitable nonprofit revenue is hard to predict because its main sources respond to economic stress at different speeds and for different reasons. Individual giving reacts to household budgets and market performance. Foundation grants follow endowment returns with a lag. Government funding follows appropriations and payment cycles. Program fees follow the finances of the people you serve. A scenario plan is stronger when it treats each line separately rather than applying a single percentage haircut to total revenue.
Individual Giving
Individual giving is the largest source of charitable support in the sector, and it is also the first line donors reconsider when their own finances tighten. According to the Giving USA 2026: The Annual Report on Philanthropy for the Year 2025, total U.S. charitable giving reached $617.2 billion in 2025 across individuals, foundations, bequests, and corporations, and individual donors accounted for $394.2 billion of that, roughly 64 percent.
When you model individual giving, two factors deserve their own assumptions: its link to the stock market and how concentrated your donor base is. Giving USA attributes much of 2025’s growth to strong equity markets, and the same relationship works in reverse: when portfolios fall, larger gifts and appreciated-stock gifts tend to slow. On concentration, when smaller and mid-level donors pull back, an organization becomes more dependent on a handful of large gifts. If the top ten donors account for a third of contributed revenue, a downside scenario should ask what happens if two of them give half as much. The fundamentals of fundraising do not change in a difficult year; the scenario exercise simply asks what the budget looks like if those efforts hold giving flat rather than growing it.
Foundation and Institutional Grants
Foundation funding is generally stable in the short term, and Giving USA reports that foundation giving has stayed above $100 billion each year since 2022. That stability depends on the markets, though, because foundations give out of their investment portfolios. A private foundation’s required annual payout is based on the average value of its assets over the prior year, with many foundations setting grant budgets on a rolling. The result is that a market decline usually reaches grant budgets a year or more later rather than right away.
For your scenarios, that delay means a bad market year belongs in next year’s downside case rather than this year’s. Do not assume a multi-year funder renews at the same level automatically, and treat the timing of payments, not just the award amount, as a variable. A grant awarded in January and paid in June is a cash flow gap that reserves have to bridge.
Government Grants and Contracts
Government funding is a major revenue line for many direct service organizations. Candid’s analysis found that about 30 percent of nonprofits filing a full Form 990 report receiving government grants, and among human services organizations that do, 40 percent report those grants as their primary source of revenue. Government funding also carries risks that have little to do with the economy: budget delays, late payments, and shifting policy priorities. The Nonprofit Finance Fund’s 2025 State of the Nonprofit Sector Survey found that among respondents with government funding, 55 percent reported being paid late, and 11 percent reported average payment delays of more than 90 days.
A late payment is not lost revenue, but it behaves like lost revenue until it arrives. That is why government funding needs two assumptions, timing and amount, rather than one. The downside case might assume a payment arrives 90 days late but in full; the severe case might assume it is both late and reduced. A delay and a cut produce different cash positions in different months and point to different reserve requirements. Over time, reducing dependence on any single government source, where the mission allows it, gives the organization more room to absorb the delays that do occur.
Program Service Fees
Some charitable nonprofits earn a meaningful share of revenue from fees for healthcare, education, childcare, counseling, or workforce programs. This revenue tends to soften at the same moment demand rises, because the people you serve are the same people whose finances are under pressure. A scenario for fee revenue should ask what happens if enrollment holds but collections slip, and what happens if sliding-scale or hardship adjustments increase.
The encouraging part is that fee-based programs offer more levers than most revenue lines: fee schedules, scholarship support, grant offsets, and lower-cost delivery formats. Naming those levers in advance, and estimating what each is worth, turns a vague worry into a set of decisions the committee can make quickly.
How Each Revenue Line Responds to Pressure
The table below summarizes how each revenue line, plus demand, tends to behave and offers a starting point for the downside case. The lines are not tested separately; their downside assumptions are combined into one scenario.
| Budget variable | What drives it | How quickly it tends to move | Starting point for a downside assumption |
|---|---|---|---|
| Individual giving | Household budgets and the stock market; donor concentration sets how exposed you are | Within a year | Giving comes in flat or below budget, and one or two major donors give less |
| Foundation grants | Foundation investment returns, felt a year or more later | Slowly, in later grant cycles | A major grant is delayed a cycle, renewed at a lower level, or not renewed |
| Government grants and contracts | Government budgets, how quickly agencies pay, and shifting policy priorities | Suddenly, on the funder's timetable | Payment arrives months late, the contract is reduced, or both |
| Program service fees | Finances of the people you serve | Within a quarter | Enrollment holds but collections slip; hardship and sliding-scale adjustments rise |
| Demand for services (a cost driver, not revenue) | Economic stress in the community | Immediately | More people seek services while revenue is flat or falling |
The table describes general tendencies, not predictions, and results vary by organization. Your own worst recent year for each line is a better starting point than any general figure.
What Happens When Demand Rises and Resources Do Not?
When demand rises and resources do not, a charitable nonprofit is asked to serve more people with less. Nonprofit Finance Fund’s 2025 survey found that 85 percent of nonprofit respondents expected demand for services to increase, while 36 percent had ended the prior year with an operating deficit, the highest share in the survey’s ten-year history.
That combination is why demand belongs in the scenarios you test. A downside case that models a ten percent revenue decline but assumes flat demand understates the real pressure on a direct service organization. The more useful question is what it costs to serve 15 percent more people with 10 percent less revenue, and for how long the organization is willing to do it.
Costs deserve the same treatment. Staffing is the largest expense for most nonprofits and the hardest to cut quickly, so a downside scenario should ask which positions are funded by a specific grant or contract and what happens to them if that funding is delayed or reduced. Vendor contracts, technology, and insurance renew at whatever the market charges. Organizations that sort costs into fixed, variable, and discretionary, and review renewals early, have more options when a scenario turns real.
How Do You Build Nonprofit Budget Scenarios?
Building nonprofit budget scenarios starts with the approved budget as the base case, then changes a small number of assumptions to create a downside and a severe case. The goal is not precision. It is to see which combination of events produces a cash shortfall, in which month, and how large it would be.
The process has five steps:
- Identify the five or six variables that drive your budget. For most charitable nonprofits these are individual giving, foundation grants, government funding, program fees, demand for services, and staffing cost. Ignore the small lines.
- Write down the base-case assumption for each variable. This is usually the number already in the budget, stated as an assumption rather than a fact: “individual giving grows 3 percent,” “the state contract is paid within 45 days.”
- Set a downside value for each. Use your own history where you have it. If individual giving fell 8 percent in your organization’s worst recent year, that is a better downside assumption than a sector average.
- Combine the assumptions into scenarios and project cash month by month. A downside case might assume giving comes in flat, a government payment arrives 90 days late, and demand rises 5 percent. A severe case adds a 15 percent cut to a major grant on top of that. Projecting cash month by month, rather than for the year as a whole, shows the committee which month a shortfall would begin and how large it would get.
- Attach a response to each scenario. A downside scenario is only useful if it leads to a decision: which expenses flex, which reserve tier covers the gap, and who is authorized to approve a draw. For each scenario, name the expenses that flex, the reserve tier that covers the gap, the approval required to draw on it, and the point at which the board would be asked to make a larger decision.
A downside scenario is only useful if it leads to a decision: which expenses flex, which reserve tier covers the gap, and who is authorized to approve a draw.
How Do Scenarios Shape Your Reserve Strategy?
Scenario planning turns a reserve target from a rule of thumb into a number your organization can defend. If the downside case shows a shortfall in month five, the committee knows how much should sit in a reserve it can reach within days, and how much can be held in a longer-term pool.
A common structure is to hold reserves in tiers: an operating reserve for near-term shortfalls, an intermediate or stability reserve for multi-year pressure, and a long-term reserve for strategic needs. Each tier has a different job and a different investment approach, and the scenarios tell you how much belongs in each. Our reserve strategy page walks through that structure in more detail.
Once the scenarios produce a number, peer data gives the committee a benchmark it against peers. The Study on Nonprofit Investing (SONI) peer benchmarking dashboard shows how organizations of similar size and type hold and invest their reserves, so the committee can see whether its target is in line with peers or understand why it differs. It is a reference point to react to, not a figure to adopt.
Updating your reserve policy? Use our Sample Reserve Policy Template as a starting place.
Restricted Funds Cannot Cover an Operating Gap
Money a donor or funder has restricted to a program cannot cover a general operating gap, no matter how much of it is in the bank. A scenario that shows a healthy total cash balance may still show an unrestricted shortfall, and it is the unrestricted balance that keeps the lights on. Model them separately.
Timing Matters as Much as the Total
The NFF survey found that more than half of respondents had three months or less of cash on hand, and 18 percent had one month or less. For an organization in that position, a 90-day government payment delay is not a planning exercise; it is a payroll question. The scenario plan is what makes the case, to the board and to funders, for an operating reserve that matches the organization’s actual payment cycles.
Each Reserve Tier Needs Rules
Each tier also needs rules: who can approve a draw, under what conditions, and how the reserve is replenished afterward. A reserve policy that documents the tiers, the triggers, and the approvals is the natural output of a good scenario exercise.
What Do Scenarios Mean for Your IPS?
Scenarios affect your Investment Policy Statement (IPS) in one specific way: they tell you how much liquidity you need, and when. The IPS governs how your reserves are invested, including how much risk the board is comfortable carrying and how much needs to stay accessible.
Whatever shortfall the scenarios show, plus a margin, should be held where it can be reached without selling long-term investments at a bad time. Money that may be needed within a year is held conservatively. Money no plausible scenario touches for five or more years can be invested for growth.
The IPS should be reviewed when the organization’s circumstances change, such as a new major funding source, a change in budget size, or a scenario that reveals a liquidity need the current allocation does not cover. It should not be rewritten because the market had a bad quarter. That distinction is the subject of our companion article on what a finance committee should do during market volatility.
Looking for opportunities to strengthen your Investment Policy Statement? Use our Sample Investment Policy Statement Template as a starting place.
How Should the Finance Committee Use Scenario Planning?
Scenario planning works best as a standing part of nonprofit financial planning rather than a one-time exercise. Two points on the calendar fit naturally: budget development, when the downside and severe cases can be built alongside the base case, and mid-year, when actual results can be compared against them. The mid-year review covers four questions: which scenario is the organization closest to, what has changed in the assumptions, is the reserve position still adequate for the downside case, and has anything about the organization changed that the reserve policy or IPS should reflect.
Documenting the scenarios and the agreed responses, and walking new committee members through them as part of board education, is what keeps the exercise alive through committee turnover.
How Raffa Can Help
The results of a scenario exercise need to be carried into two documents: the reserve policy, which sets the tiers and the rules for drawing on them, and the Investment Policy Statement, which sets how each tier is invested and how much stays accessible.
Raffa Investment Advisers works with nonprofit finance committees on both. That work includes reviewing the scenarios with the committee, assisting with reserve tiers and liquidity targets that match them, and updating the reserve policy and IPS accordingly. Raffa has served nonprofits and associations for more than 20 years and currently serves nearly 200 nonprofit clients nationwide, as of June 30, 2026.¹
Schedule a Meeting with Our Team of Advisors Experienced in Partnering with Nonprofits
Frequently Asked Questions: Nonprofit Scenario Planning
How many scenarios should a nonprofit build?
Three is usually enough: the approved budget as a base case, a downside case built from a realistic combination of setbacks, and a severe case in which several setbacks arrive at once. Each revenue line gets its own assumption within those scenarios, but the scenarios themselves stay at three. More than that tends to dilute the committee’s attention without improving the decisions.
What is the difference between a budget and a scenario plan?
A budget is the single set of assumptions the board has approved for the year. A scenario plan is two or three alternative versions of that budget, each showing what would happen to cash flow if specific assumptions turned out to be wrong, along with the response the organization has agreed to in advance. The budget is the plan; the scenarios are the contingency.
How does scenario planning affect how much a nonprofit should hold in reserve?
Scenario planning replaces a general rule of thumb with a figure grounded in your organization’s own risks. If the downside case shows a specific shortfall in a specific month, that shortfall, plus a margin, is a defensible basis for the operating reserve. Peer benchmarking data, such as the Study on Nonprofit Investing, adds context but should not replace the organization’s own scenario work.
Can restricted funds be used to cover a shortfall identified in a scenario?
Generally no, because funds restricted by a donor or funder to a particular program or purpose cannot be used for general operations, even when cash is tight. That is why scenario plans should project unrestricted cash separately from total cash. The unrestricted balance is what covers an operating gap.
About the Author
Mark Murphy, CFA
Mark Murphy, CFA, is Chief Investment Officer at Raffa Investment Advisers and has more than 15 years of direct experience serving as an OCIO and lead portfolio manager for nonprofit organizations and membership associations. As Chief Investment Officer, Mark works closely with investment committees and staff to implement policy-driven investment programs designed to balance liquidity needs, risk management, and long-term financial sustainability. Mark is an active participant in the nonprofit and association community and has spoken on governance, fiduciary oversight, and nonprofit investing for organizations including the Greater Washington Society of CPAs, the AICPA, BoardSource, and the American Society of Association Executives.
Disclosures: The Study on Nonprofit Investing (SONI) Dashboard is a complimentary peer benchmarking resource developed by Raffa Investment Advisers using IRS Form 990 and other publicly available data aggregated by Cause IQ. While we believe the data to be reliable, we cannot guarantee its accuracy or completeness. SONI data is not verified or audited, is provided for informational purposes only, and should not be relied upon as the sole basis for financial, investment, or operational decisions.
Portions of this article were drafted with the assistance of AI tools and reviewed by Raffa Investment Advisers staff for accuracy and compliance.
Raffa Investment Advisers is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results.
Any forward-looking statements are based on current expectations and are subject to uncertainties.
This article is for informational purposes only and should not be construed as personalized investment advice.