Written by by Fleur Holden, Sayer Vincent

The theme of this year’s Mental Health Awareness Week (15-21 May) is anxiety, which is a key issue for charities right now. While organisations are still recovering from the pandemic, they are now contending with a cost-of-living crisis too so many are anxious about their finances.

Analysis by Pro Bono Economics last year highlighted that income, increasing demand for their services, inflation and energy prices are the top concerns for charities[i]. Other research from the Charity Finance Group highlighted that half of charities worry about their survival and their ability to deliver services due to the current crisis[ii].

During these times, charity finance professionals must manage their finances effectively to steer the charity during these economic challenges. So how do they do this, while remaining calm and focused?

The first step is to get a realistic picture of the current financial situation and understand what actions could improve things and there are some key questions for a charity finance professional to consider:

• How secure is our cash flow and do we need to change any of the assumptions underpinning our forecast?
• Are any of our income streams at risk of reducing or stopping? What might this mean for associated costs?
• How do I provide helpful information to reassure our trustees about our financial position?
• What can we do ourselves and at what point might we need professional advice?

Once these questions have been considered we recommend the following key actions:

1. Understand the business model:

Break down the charity’s business model into distinct parts to get a clear picture of any operational surpluses or deficits. This will help you understand the financial performance of every activity you undertake, and any funding restrictions.

Actions to consider:

• Map out what has changed recently and how this impacts the financial plans:
  • How does the cost-of-living crisis affect our ability to fundraise? Can we negotiate sufficient inflationary increases for any longer term funded contractual or grant funded activities? How have our investments performed this year?
  • Do we need to award pay increases to remain competitive when recruiting and retaining our team? If so, can we fund these (as above) or will this need to come from existing reserves in the shorter term?
  • Have we anticipated all other relevant cost increases for inflation / energy price rises?
  • Do we need to make any significant capital investment in our infrastructure, either physical or digital, and how might we fund this?
• Be clear about any restricted sources of funding and what costs are linked to these. Should the funding cease, what would be the impact on the general funds in terms of meeting any gaps to continue projects or fund overheads?
• Create a funding pipeline mapping out key sources of funding and when these are due to end or be renewed. Ensure you have clarity over whether the source will be replaced or whether you need to consider ending these activities.
• Identify any sources of funding linked to performance conditions or a payment by results mechanism and if these would be impacted by any short- or medium-term disruption to the delivery of your charitable activities.
• Link your risk register to the above and ensure you have plans in place to mitigate your key operating and financial risks.

 

2.Cash versus profit and impact of funding restrictions

Many charities plan by looking at a budget for the forthcoming financial year. The budget is normally based on the income and expenditure expected on an accruals basis, so adjusted to reflect the year to which is relates, not necessarily when you would expect to receive the income or incur the cost.

Project financing can often be received in advance or in arrears. Restricted project funding may also be cash in the bank, but not available for general purposes. Therefore, the budget should be supported by a cash flow forecast on a pure receipts and payments basis which reconciles back to the cash in the bank. The cash figure should also clearly distinguish between restricted and unrestricted cash reserves.

Actions to consider:

• Review your budget and cash flow forecast to ensure each one is clearly prepared on either an accruals or receipts and payments basis.
• Confirm that your cash flow forecast splits your unrestricted cash resources and your working capital requirements can be met out of unrestricted cash alone.
• Ensure any financial documents are supported by narrative papers clearly explaining how they have been prepared.

 

3. Engagement of budget holders

Consider how engaged your budget holders are and establish if they are fully accountable for their budgets and understand the impact when budget variances occur. The impact of inflation is difficult to predict and will impact on budgeted revenue and your underlying cost base. Budget holders will want to ensure that anything they are responsible for is within their remit of control / influence.

Actions to consider:

• Arrange a catch up with each key budget holder.
• Discuss any concerns and identify where budget variances are expected, where are the uncertainties and what is the probability of them arising?
• Identify any gaps you may need to pick up with another member of the team.
• Ensure these variances are built into any cash and/or profit forecasts.

 

4. Communicate and engage the board.

Your trustees may be feeling concerned and have their own questions around the financial position. Ensure you communicate the situation clearly to address their concerns and the board the assurance they need.

Actions to consider:

• Facilitate a discussion at the next board meeting to check if the information being provided is clear and accessible to everyone – does the board have any requests for extra information or a different presentation?
• Would it be helpful to provide a easily updatable dashboard or other quick, visual representation of the financial position?
• Is any training required on the analysis / trends shown by your key business drivers or performance indicators?

 

5. Other considerations

After taking these actions it may be necessary to consider how to best use your capital assets to support your operating position in the short term. It is important to remember that when using the proceeds from the disposal of a capital asset or investment to fund working capital it is a permanent reduction in your reserves position.

The trustees of a charity also must think about all potential future options, and this may include an increase in collaborative working, formal partnerships with other similar organisations, or even a merger.

Actions to consider:

• Revisit your reserves policy and link this to your short- and long-term cash flow requirements.
• Consider whether all your charitable assets are used to their maximum potential.
• Identify any assets that may be available for disposal to generate cash, specifying the lead time to access the proceeds.
• Arrange a trustees’ meeting to focus purely on strategic options and identify actions that can be taken now rather than waiting until any timing is critical.

To conclude

Taking these actions now will ensure finance professionals fully understand their charities financial position and see any potential issues and funding gaps. It can also help reassure the trustees and budget holders at a time when many may have concerns around income.

The above suggestions will be applicable to most charities; however, there can be specific considerations depending on how you are legally structured. Further guidance is available within the Charity Commission’s publication CC12 ‘Managing a charity’s finances: planning, managing difficulties and insolvency’. It’s also worth noting they have also re-released CC8 on financial controls which we recommend revisiting too.

Sayer Vincent offers lots of other useful resources on a wide variety of different charity finance topics, so recommend you take a look at our resource library.

 

[i] https://www.probonoeconomics.com/budget-2023

[ii] https://cfg.org.uk/knowledge-hub/charities_urge_chancellor_to_act_now_with_targeted_support_to_help_communities_during_cost_of_living_crisis