Managing the future
Every charity needs to think about its future and prepare for it. This involves the creation of a strategic plan which is linked to the income of the organisation along with its resources and reserves which feed into a budget for its delivery. Ideally, the budget is arranged over a period of more than one year enabling it to support the delivery of the strategic plan. This plan will involve consideration and understanding of the income generation of the organisation and its associated risk.
Understanding income risk
Every charity will have its own unique income risk profile. Some income is more inherently risky such as legacy income and its budgeting and predictability. Other income such as residential care home fees may be less so but voids can be unpredictable, as will cash collection perhaps.
Income risk is simply about asking yourself lots of questions to understand the risk around each income source, and then documenting this in a meaningful fashion.
For example, let’s consider donation income from trusts and foundations. How much has been agreed and signed for in grant agreements? How much is promised or is work in progress to finalise the agreement? And how much is purely speculative? Similarly, each other income line or category will have income risk within it to a greater or lesser degree. The budget for the year will be a mix of all of these assumptions leading to a suggested prediction of income from trusts and foundations. It is important for the board to be aware of the difference in guaranteed income against the pipeline and against estimated income for budgeting purposes. This is important in order to understand the income risk that the budget has within it and to monitor that risk over the year. A budget provides an annual snapshot and this information should also be clear, with speculation and assumptions included in any such figures. Many organisations may look at longer-term income forecasts and budgets which help plan for beyond the coming year.
Each set of management accounts needs to continue to inform the board with an update against each of these income streams and their risk of achievement as the year progresses. This helps the board understand the whole picture so they can make informed decisions around whether the budget can be delivered or if they need to take precautions such as reducing costs. A good reserves policy will also help the organisation in monitoring and managing its income risk in both the current year and future years, informing the strategy and decision making.
How can reserves help?
Reserves are about the active management of an organisation to help it survive a period of difficulty and manage its way back into sustainability. However, reserves should not be looked at as a desire to hoard funds to give the charity peace of mind. Reserves need to work as hard as income generation, achieving the budgets and delivering on the objectives of the charity.
Therefore, it is important to have a clear reserves policy that the board can understand and review, which balances holding funds (and why they hold them) with spending them. An easy way to think about reserves is to build up a picture of why the organisation needs to hold funds and why. A simple example is perhaps fixed assets – these could be designated as a separate fund or form part of the free reserves – but are illiquid funds which represent the net book value of the fixed assets owned by the charity and used to deliver charitable services and activities.
Another reserve could be an income risk reserve. For example, legacies are unpredictable and income levels could fluctuate year-on-year. Past performance has no meaning for future receipts. So to help manage these peaks and troughs, a charity could use good years to put funds aside for leaner years to bring a more even and sustained level into the yearly budget managed through transfers form this reserve. The level of this reserve would need monitoring if it grows too big to release funds to free reserves or the amount being budgeted as income if the pot grows small. Each element of income could be thought through in a similar fashion to create an amount that forms a realistic income reserve. This reserve may sit within the free reserves but could make up one element of this pot – another could be working capital.
So reserves are not just a year-end exercise to consider when drafting the statutory accounts but form a crucial part of the financial management of an organisation throughout the year.
The board needs to take active responsibility for managing the finances of the organisation which requires reacting to and dealing with the actual results in the management accounts and how this affects the future strategy and plans of the organisation. If income plans are not being achieved, the organisation needs to consider how it will deal with this situation, whether this includes using reserves, recruiting additional resource to generate income, seeking new income sources, considering mergers and collaborations or cutting costs. One of the key aspects of managing the risks is building resilience into the organisation by not being overly dependent on one type of income and building an earnt income into the structure – from trading or better still, charitable income.
To find out more information on managing the future of your charity, please contact Helena Wilkinson contact.
This article was written by our Charity Partner, Helena Wilkinson. If you would like more information on this article, please contact Helena using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.