Charities and not-for-profit organisations in 2018 will continue to face challenges in ensuring they can remain on a sound financial footing.
Financial insecurity can often result in reactive and short-term thinking, whereas taking a broader, longer term view of the situation can provide charities with much needed stability and even present new opportunities.
However, developing a financial strategy that will ensure sustainability can take time and will involve many different aspects for an organisation to work through. Sayer Vincent have previously run workshops on this topic and identified three key steps that can help charities to form a plan.
Understanding your business model
You may think this is obvious to everyone, but stepping back and thinking about the key factors that determine how you operate is the vital first step organisations should take to ensure that everyone is starting from the same place. This will also help to identify what the key financial risks are for the charity. Some key questions that can support this process are:
• What their business model is;
• Their key financial risks;
• Their current financial position;
• Where the organisation needs to be to ensure it can fulfil its strategic objectives.
The last question is arguably the most critical but it is often overlooked. For charities, there is often little or no relationship between the income and expenditure, therefore becoming a primary cause of financial instability.
By answering these questions organisations will be able to establish:
• What are the organisation’s key activities?
• How are these activities funded?
• How flexible is the cost base?
• What is the working capital requirement?
• How are the charity’s capital commitments financed?
• What is the relationship between its income and expenditure?
Thinking about reserves
Once the organisation’s business model is understood and their risks are identified, the next step is to consider the type of reserves policy needed. The overall aim must be to spend money to help the beneficiaries as quickly and as efficiently as possible, with reserves at hand to manage the financial risks of the charity. Needs can differ widely between charities and there is no one size fits all answer. The goal in this context is for organisations to ensure they consider why the reserves are needed, rather coming up with a figure.
Establishing a financial strategy
The final stage is coming up with an appropriate strategy that determines how the organisation can get from its current position to where it needs to be. It may already be where it wants to be, so the strategy might be to remain operating in the same way. It is no bad thing to come to that conclusion.
Another option is to diversify the charity’s income streams. This is an option which usually requires high levels of upfront investment and effort, which may also include long lead time before results come to fruition. Therefore, it is important for charities to establish a mechanism to manage the risks involved in this approach, such as, undertaking a phased investment based on key milestones or by monitoring pipelines.
Some charities may consider changing their model completely by changing the focus of activities or collaborating or merging with other charities. However, changing the business model entirely may have other strategic implications that need to be considered as well.
Finally, there may be external factors outside the organisation’s control that force a change in strategy. The move from grants to contracts and performance by results arrangements by government is a prime example. Charities have been forced to adapt their financial and business models to facilitate these changes. Some charities have decided they cannot provide their services in the way they wish to under the new arrangements and have had to walk away from them.
No organisation is the same, but each one needs a good financial strategy in place as a starting point. With a solid financial foundation charities can then implement their strategy and plans with confidence.
Strategic financial management will be a major theme of the Charity Accountants’ Conference in September. Click here to find out more about the wide range of sessions for charity finance professionals we’ll be running.
*Originally published in the Charity Finance Group’s ‘Focus’ Magazine (Feb 2018).