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Charity: Financial resilience Insights

Charity insight: focusing on financial resilience

Organisations need to prioritise their investments and have contingency plans in place.

To remain financially viable and continue to deliver on its purpose, a charity's financial planning has never been more important, and some new strategies may be required to build financial resilience.

Nazreen Visram

Head of Charities, Barclays Corporate Banking

Article 3: Financial resilience

This is the third in a four-part series of charity insights in which we share our thoughts and those of guest speakers at our 11th National Charities Day on strategies for confronting the many challenges facing the sector.

Financial planning

These are challenging times financially for many charities, with cuts in local government funding and the cost-of-living crisis putting pressure on cashflows and reserves at the same time as a big rise in demand for the services they provide.

People at Mencap want to help change the lives of people with learning disabilities. So we have to communicate the importance of financial resilience – and everyone’s role in achieving it – in a way that explicitly links to our purpose every step of the way.

Richard Blakey

CFO, Mencap

Sharpening up forecasting

Mencap’s CFO Richard Blakey says his organisation’s decisions about investing or cutting back are always guided by three-year financial planning projections and targets that are monitored monthly and regularly updated.

Vikram Sandhu, Director and Audit Principal at Haysmacintyre, applauds that approach, especially the flexibility to change the plan if required: “You need to have some levers you can pull if this or that doesn’t happen.”

Effective financial planning also depends on charities identifying the right key performance indicators and monitoring them closely.

Balancing investments and reserves

Striking the right balance between investment and reserves is, of course, an ongoing challenge for charities, with maintaining around six months’ worth of expenditure the standard rule of thumb for reserves levels.

However, Vikram Sandhu at Haysmacintyre advises charity clients to adopt a more risk-based reserves policy: “Move away from that traditional approach and ask yourself, what will be the impact on reserves in different scenarios?”

Richard Blakey at Mencap says it regularly monitors cash reserve levels so it can respond quickly to unexpected costs and be confident when investing for the future. “We need to have a sort of no-surprises business – in a low-margin world you don't want to wait for six months for something to happen and then have to change your plan.”

Steps to consider

Adopting ‘what if?’ financial planning

Use of a ‘what if?’ approach to financial planning came to the fore during Covid 19. With fresh challenges ahead it may be prudent for many charities to stick with this way of thinking and always have a plan B ready to go.

Richard Blakey at Mencap says the charity has introduced stress-testing into its financial planning that is focused on “what it would take to break our business”.

Mencap has identified key triggers that would suggest the organisation is heading for that breaking point and monitors these on a regular basis. “That gives us an early warning sign,” says Richard, “and if any of those trigger points are hit that's when we formally know we have to take action to do something about it.”

Communicating with stakeholders

It’s important to regularly and clearly communicate to all stakeholders the challenge your organisation is trying to address, how you’re going about it and the progress you’re making.

The way you communicate will likely need to change depending on the audience – but the core message should be consistent and transparent.

Stakeholders don’t want surprises, like last-minute changes to plans, so regularly report on progress – not only the charity’s position in the here and now but also what you think that might mean for longer-term targets – perhaps one, two or three years ahead.

Scrutinising financial viability

Funding issues have persuaded many charities they need to adopt a much more commercial outlook when it comes to the financial viability of the services they provide.

Charities face difficult decisions, but Richard Blakey at Mencap says: “You’re doing people a disservice in the long term by providing a service if you can’t deliver the quality you want with the funding you have.”

A more commercial attitude should also extend to procuring services and negotiating contracts with third-party suppliers, particularly for technology and recruitment services.

Charities should also optimise any non-core assets they have – for example, disposing of unused properties or reducing the space they occupy to rent out to other users.

Staying focused on priorities

Making difficult decisions about where to spend limited funding is more straightforward if charities stay focused on the priorities that support their core purpose.

Richard Nixon, FareShare’s Director of Finance and Resources, urges charities not to be distracted by a myriad of different initiatives or “pet projects”. If it's not aligned to your core purpose, he adds, there has to be a question mark about the project.

He even suggests that a charity might be advised to turn down an offer of restrictive funding if it doesn't help it pursue its own strategy: “It might be aimed at something very interesting but it’s not the right decision if it’s going to start polluting your core direction.”

More in this series

Charity insights: taking the lead, shaping the future

Charity insights: taking the lead, shaping the future

The strong and effective leadership skills needed in the charity sector to navigate a shifting landscape have never been more important.

Charity insights: harnessing the potential of AI

Charity insights: harnessing the potential of AI

Find out how AI can be a tool for the charity sector.

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