Strategic Financial Management

(Acevo Seminar Series)

By Mark E Freeman Chief Executive Charity Business

Contents
Strategic financial management Breaking it down Tools Failure Summary

Strategic Financial Management

Definition: the application of financial techniques to strategic decisions in order to help achieve the decision-maker's objectives Strategy: a carefully devised plan of action to achieve a goal, or the art of developing or carrying out such a plan Finance: the business or art of managing the monetary resources of an organisation Management: the organising and controlling of the affairs of an organisation or a particular sector of an organisation

Strategy
According to Professor Michael Porter of Harvard Business School, Fundamental to the success of any company and to any effort to develop strategy is having a proper goal for business clearly in mind. Purpose: How will your organisation achieve its desired financial position? To achieve this, you must ask: WHAT future position do you aim to reach? WHERE are you now? HOW - are you going to get there?

Finance
What future financial position should the charity reach? How does it intend to get there? How does the charity intend to manage the competing demands of spend versus retain? Do the charitys trustee and management understand the primary statements?

Management
Although linked with accounting, the focus of strategic financial management is different. As David Allen notes in his book Strategic Financial Decisions: A Guide to the Evaluation and Monitoring of Business Strategy. Strategic financial management combines the backwardlooking, report-focused discipline of (financial) accounting with the more dynamic, forward-looking subject of financial management. The key elements of each, combine to provide the essence of strategic financial management, and are: Accounting Financial

Passive Impartial Standardised

Management Reporting Control

Proactive Involved Customised

Management Contd
Backward looking Verifiable Realised Tangible Forward looking Judgmental Potential Intangible Inward looking Objective Costs Capital maintenance Outward looking Subjective Values Adequate return

Management Contd

Static

Discrete Short-term Profits/Assets Continuum Long-term Cash flow

Dynamic

Breaking the Strategy Down

1. 2. 3.

Immediate needs Short Term requirements Medium/ Long Term Requirements

Immediate Needs

Cash Pressures on the charity : Income Flows; Expenditure; and Capital/ one off expenditure Resources it can utilise (brand, position, etc) Current position ensure this is correct before moving on

Short Term Requirements

6-12 month plan Action points to turn these into financial strategy Realism Cash and accrual budgets for next ,and following 5 years Systems in place to support the strategy Alignment of strategy with corporate plan

Medium / Long Term Requirements

Income streams new/ different? Expenditure investment into future income streams. Address the imbalance of revenues and expenditure Finance what type is most suitable? Reporting and managing the strategy Expertise

Tools of The Trade

KPIs

Business/ corporate plan

Budgets

Financial Statements Cash Flows

TOOLS

Mment Reports Project Budgets

Forecasts

Business Plan
Definition: Mission or corporate plan as to what the charity is going to do and by when
Normally includes: Overview of the charity Market place Assessment of market and services Why and what makes it unique and what it is going to do Executive management Fundraising and marketing SWOT Current financial position and Finance requirements

Budgeting & Re-forecasting

Decide on the best method for the charity to use for the next few years: Zero based budgeting; Actual with historical; Project budgeting; and Combinations of these. Relate the annual budgets back to the original business plan and assess any variances and their impact on the overall plan. Re-forecasting, decide at before the budget process the timeframes for this to occur: Monthly; Quarterly Semi-Annually

Cost Control & Assessment

Understand the major costs of the charity including salaries and process of increases, recruitment and related staff costs; Look to simplifying the expenditure streams suppliers, cycles of payments; - Reduce numbers of

For one-off expenditure understanding how to best ring fence them and how they will be cut at the end of the project; Project budgeting for areas of new expenditure; Understand where you are making an investment and how this is going to be funded; and Understand long term commitments.

Cash Flow Management

Needs to be detailed not summary; Needs to take account of cyclical factors; Needs to be understood by management - especially the implications of it; Needs to be conservative; and Should not take account of positive items that will improve the bottom line when there are a number of unknowns.

Saving for a rainy day?

Reserves policies

The Current State of Affairs

Charities currently hold 26 billion in reserves or equivalent to the annual income of the sector. The reserves policy should align with your overall strategy otherwise how will you know what reserves you require? 70% of charities with income greater than 10,000 do not have a reserves policy! Charity Commission found that 5.5 billion is being held by charities in financial reserves without being accounted for by a reserves policy! Media criticism due to not understanding why reserves are held in the first place or the rational behind holding reserves

What are Reserves?

The resources the charity has or can make available to spend for any or all of the charitys purposes once it has met its commitments and covered all its other planned expenditure (SORP 2000) Reserves should exclude: Permanent Endowment Expendable Endowment Restricted Funds Designated Funds Income funds that could only be realised by disposing of fixed assets held for charity use.

All we are interested in is the General Reserves!!!

Reasons for Holding Reserves

To fund working capital To fund unexpected expenditure e.g. Unplanned events In the event of large variations in income To fund future income generation To fund future charitable expenditure In the event that everything goes the wrong way!

The main reason is the worries about income variation!

Summary of Reasons
Reason for Reserves Closure Prudence Budgeted change Unexplained variability Special projects Capital funding Explanation to enable the charity to meet its obligations (e.g. paying its creditors) in the event of winding up the charity to provide a minimum level of cover as best practice or a rule of thumb to provide cover beyond the minimum level to cope with expected changes in activity levels and/or timing differences to provide an additional level of cover which attempts to cover unexplained (or unforeseeable) variability in income and/or expenditure streams to provide additional finance which enables the charity to fund special projects on an ad hoc basis to provide sufficient finance to support the charity's longer term programmes (in extremis, a charity with sufficient capital reserves such that on an actuarial basis it can support its objects in perpetuity would be fully endowed)
Curtsey of Z/Yen Limited

Developing a Reserves Policy

Part of strategic plan Budgeting and decision making process Focuses fundraising activities Communication to external parties Best Practice/ SORP

What should it cover?

The reasons why the charity needs reserves The level/ range of reserves that the Trustees believe the charity needs What steps the charity is going to take to establish/ maintain the level Arrangements for monitoring / reviewing the levels of reserves.

Its about why and articulating it!

Risk Based Approach

Analyse existing funds Review future income streams/ assess reliability and significance Review committed expenditure and the controllability of it; is it fixed or variable? Assessment of the risks the charity faces looking at the potential commitments and contingencies and assess the likelihood of these materialising.

Risk Based Approach Contd

Analysing existing funds Review the balance sheet to ensure that all endowment and restricted funds have been identified Ensure that all designated funds can be justified and there are no further ones Identify assets that cannot be readily converted into cash

Risk Based Approach Contd

Analysing Future Income Streams Review existing funds likelihood of continuation Risk with existing funding number of sources A risk profile of future income streams can be built using the following information: Type of income/ Source of funding Current level Proportion of total income as % Do you expect level to increase or decrease? How many other funders can help? How certain is the source of funding in the future?

Risk Based Approach Contd

Analysing committed expenditure What are the expenditure patterns and to what extent can the charity curtail or change the timing of cash outflows? Reserves may be required to fund expenditure in advance of income receipts. Assess: Type of expenditure Current level of expenditure Proportion of total expenditure How far does this expenditure go towards reaching the charitys objectives? Number of people affected by a cut in this type of expenditure Identify the source of funding

The Essentials Steps

Review of existing funds Analyse income streams Analyse expenditure and cash flow Analyse the need for reserves Calculate the reserves level Formulate reserves policy Presentation of reserves policy Other Approaches to Determining Reserves Status Quo What we need to keep going Cease to be costs to wind charity up Actuarial Liability

Reserves
Dont confuse size with liquidity; Needs to be aligned with income and expenditure patterns; Needs to be at a level that can be justified and presented in line with the strategy; Take into account commitments that are not on the books when calculating optimal levels; Understand the split between restricted and unrestricted funds; and Who else needs to understand the reserves and how they are structured.

Reporting Tools of the Trade

Business plan or corporate plan Budgets Management reports Financial statements Cash flows Project budgets Forecasts Key performance indicators

Presentation of Results
Use Key Performance Indicators to monitor and gauge success and failure; Targets Aligned with mission/goals Simple and precise reporting; Focus on what has happened and how to change or utilise the results; Communicate changes needed to achieve original plan; and Identify risks and ways these can be addressed.

What do you need to present? Top level information

Income levels Main expenses Cash flow Surpluses or deficits Targets for this and coming years Corporate plan information

Funding levels Is your income

Short term Long term Fixed term Outcome dependent? Dependent on reports to funders?

Key costs What are the main costs? How do you analyse them? What trends are there in these costs? Are costs linked to income? Do you measure this relationship?

Recommendations Produce departmental summaries Rotate a review of each area Look at the Balance Sheet twice a year Review your cash flow at least once a quarter

Recommendations Produce a one-page summary of the key information to carry in a wallet Become involved in the creation of budgets .and monitor them via forecasts Make the numbers tell a story

Reasons For Failures

No mission/corporate statement agreed in terms of identifiable deliverables No understanding the current position and what is really achievable from it Timetable to short to develop plans Under investment in future resources or requirements to achieve the plan Reporting to complex and not understood easy Failure to understand what is required to achieve the plan by management and trustees

Simple is Best
Understand in detail the components of your charitys cash cycle and how they affect your longer-term capital requirements Do not confuse profit (surplus/deficit) with cash flow. Turnover is vanity, Profit (surplus) is sanity, Cash flow is reality.

1+1=2

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About Charity Business

Charity Business only works for with the not for profit sector. It offers solutions through consultancy and full managed outsourced financial solutions whether in part or in full. Over the past 8 years Charity Business has been able to save charities in excess of 2 million through cost savings, improvement in processes and working with charities to maximise their resources. Charity Business has expanded since its formation in 1999 and now supports over 120 organisations in the not for profit sector. With their recent move to Kembrey Park in Swindon, the Charity Business has brought further efficiency and cost savings through an improved range of financial shared services including debit card processing facilities and automated reporting solutions. Charity Business was formed in 1999 as a direct result of a study undertaken by seven large charities, Mark Freeman and Arthur Andersen that indicated the potential savings that sector could achieve by operating in shared services or outsourced environment.

Copyright 2007 Charity Business Suite 37 40 Cherry Orchard North Kembrey Park Swindon SN2 8UH Phone 01793 554200 Email: marketing@charitybusiness.com