It’s Small Charity Week from the 18th to 23rd June 2018. Fleur Holden, Director at Sayer Vincent looks at how smaller charities can develop a robust financial strategy to ensure a sustainable future.
Earlier this year Baroness Stowell[i], the chair elect of the Charity Commission, said that the biggest challenge facing the sector is “falling public trust”. At the same time charities are dealing with financial challenges, including the decline in the availability of local authority funding and increased pressures on household disposable incomes, affecting fundraising income.
Add to this the external pressures for increased transparency within the sector, which have brought several charities into the headlines for all the wrong reasons. Recent damaging reports on some high-profile charities have highlighted that organisations can face very real financial consequences, even if the headline is about a non-financial reputational incident.
The threat of financial insecurity can lead charities into costly reactive and short-term thinking, instead of them taking a broader approach that could provide greater stability and even present new opportunities. This is why every charity no matter how small needs a financial strategy.
Developing a robust financial strategy can take time and will involve many different aspects for an organisation to work through, but it’s essential for safeguarding a charity’s future.
Here are some key considerations for creating a financial strategy.
Know your business model
Gaining a real understanding of the business model is the important first step in putting together any financial strategy. This involves taking step back and thinking about the key factors that determine how the organisation operates. This exercise is essential and will everyone starts from the same place.
Some of the questions that need answering include:
- 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?
The final question is often overlooked and for many charities there is often little or no relationship between the two, which can be the primary cause of financial instability.
The spending of funds to preserve the generation of income can also be a dilemma. The cost of fundraising, together with the cost of implementing strong compliance measures to ensure safeguarding and combat fraud for example, form part of the administration costs of an organisation – spend that does not go directly to beneficiaries but it is required never the less. While this expenditure may not be desirable from a funder’s perspective, it is essential for sustainability in the same way that good risk management and assurance is needed.
What reserve policy is needed?
Once the business model is understood and the 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, but as explained above, it is also important to have reserves at hand to manage the financial and operational risks of the charity. The needs can differ widely between charities which means 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.
Devising the financial strategy
Finally, organisations need to come up with an appropriate strategy that outlines how it will progress from its current situation 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 isn’t a bad thing to come to this conclusion.
Diversifying the charity’s income streams is another option but this usually requires high levels of upfront investment and effort, so it may take longer for the results to appear.
Some organisations consider changing their model completely by altering the focus of activities or collaborating or merging with other charities. However, changing the business the model entirely may have other strategic implications that need to be considered.
External factors that may be outside the organisation’s control that would force a change in strategy also need to be considered. An example of this is the move from grants to contracts and performance by results arrangements. Charities have needed to adapt their financial and business models to facilitate these changes or decided they cannot provide the services in the way they wish to under the new arrangements and have walked away from them.
Following these guidelines, small charities can develop a robust financial strategy to help develop and grow in the short term, serve their beneficiaries in the best way possible and ensure they have a more stable financial future.
Fleur Holden, Director, Sayer Vincent