Roland Pearce and the team at Barclays share insights from the 12th National Charities Day, looking at ways to cope with the pressures of difficult economic conditions and take advantage of opportunities.
Building financial resilience has never been more important for charities, with demand for services rising just as cuts in funding and a fall in charitable giving put pressure on cashflows and reserves.
There’s no one-size-fits-all solution – financial planning needs to take account of each charity’s unique business model – but you may wish to consider the following to help build your organisation’s resilience.
Think long-term
Charities need to consider multiple time horizons in their financial planning, taking into account their long-term strategic purpose and vision, as well as immediate financial pressures.
While most organisations will have financial projections for one, three or even five years ahead, they should also look further to consider how the nature of their services and demand from beneficiaries is likely to change over time – for example, how technology may change the way services are delivered.
This may involve some tough strategic choices and charities should be open and honest about this in their communication with stakeholders, and ready to make the case for change where necessary, especially if this affects the services they currently provide.
Finding the right systems
Having accurate, real-time, easy-to-understand information at your fingertips is the basis of effective planning and forecasting, so having the right financial management systems in place is critical.
To stay up to date, get advice from a trusted technology supplier or ask other charities about the financial management systems they are using. They should allow for ease of reporting against your charity’s specific key performance indicators to keep the organisation on track.
Bear in mind that your financial system should allow the correct staff to have appropriate access to relevant information but also that the data needs to be secure and compliant with data protection laws.
A risk-based approach
‘What if?’ scenario planning came to the fore for many charities during the Covid-19 pandemic and remains an important element of financial resilience in identifying emerging risks to the organisation and their potential financial impact.
Identifying and prioritising different risk scenarios can help charities put strategies in place to control risk based on their potential impact on cashflow and reserves.
Cyber-crime, including various forms of fraud, for example, is a threat to all organisations, and your charity may need to update its cyber security measures to protect itself.
Rebalancing costs and income
This should be both a strategic and ongoing operational priority for all organisations, whether it’s negotiating with suppliers, rethinking office space requirements or investing in technology to improve operational efficiency.
Other cost issues to consider might include outsourcing some internal functions, sharing procurement of services with other organisations and managing staff costs at a set percentage of income.
At the same time, charities should explore alternative income sources where possible, such as grants, legacies, corporate partnerships and earned income. They should also investigate the latest digital fundraising techniques, such as through social media, to reach out to potential new supporters.
Managing reserves
Nothing underlined the importance of reserves more than the Covid-19 pandemic and charities should continue to ensure they are maintained at an appropriate level, depending on factors unique to each charity, such as size, activities, income and outgoings.
They should also ensure they have mechanisms in place to counter the erosive effect of inflation, whether through simple interest-bearing cash accounts or more advanced treasury management systems.
Striking the right balance between helping people now and safeguarding the charity’s financial future so it can continue to deliver on its purpose over the long term is a key challenge for many charities, so it’s important to communicate the rationale behind your reserves policy clearly to stakeholders.
“We are seeing many charities review their treasury policy in light of the changing macro need for their services and the reducing interest rate environment we are now in. We are seeing charities consider the trade-off between a desire for short term available liquidity and protecting the return they are achieving on the balances. This prompts the treasury team to review treasury policies and the solutions available to them.” ~ Mike Rigby, Head of UK Specialist Sales, Barclays Corporate Banking
Investing for the long term
For those charities looking to bolster financial resilience through investment of reserves, the key is to set clear goals, stick to an agreed investment strategy based on your organisation’s appetite for risk and remember that for long-term investors, it’s time in the market, not timing the market, that matters most.
Charities should also be prepared for the unexpected by ensuring they have a diversified portfolio covering a number of appropriate asset classes to protect their investments over the long term. This will help ensure that they are not swayed by emotion into making knee-jerk decisions that may ultimately jeopardise long-term returns.
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.
Many of the staff and trustees at a charity don’t have financial backgrounds so there’s a need for everyone in the organisation to have a better grasp of basic finances. That way everyone can play a part in helping to ensure financial resilience.
Financial resilience was just one of the themes explored in depth at Barclays 12th National Charities Day. You can read all about these on Barclays’ website.