Strategic Financial Management

By Mark E Freeman

Contents 

Strategic financial management 

Breaking it down  Tools  Failure  Summary

Strategic Financial Management

Definition: ³the 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 charity¶s trustee and management understand the primary statements? .

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

Management Cont¶d  Backward looking ‡ Verifiable ‡ Realised ‡ Tangible Forward looking ‡ Judgmental ‡ Potential ‡ Intangible Inward looking ‡ Objective ‡ Costs ‡ Capital maintenance Outward looking ‡ Subjective ‡ Values ‡ Adequate return    .

Management Cont¶d  Static ‡ Discrete ‡ Short-term ‡ Profits/Assets  Dynamic ‡ Continuum ‡ Long-term ‡ Cash flow .

3. Immediate needs Short Term requirements Medium/ Long Term Requirements .Breaking the Strategy Down 1. 2.

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

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 M¶ment Reports Project Budgets Forecasts .

Business Plan Definition: ³Mission 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 .

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

cycles of payments. recruitment and related staff costs.Cost Control & Assessment  Understand the major costs of the charity including salaries and process of increases. and  Understand long term commitments.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.  Understand where you are making an investment and how this is going to be funded.  Look to simplifying the expenditure streams suppliers.  Project budgeting for areas of new expenditure. . .

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

Saving for a rainy day? Reserves policies .

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 .  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.The Current State of Affairs  Charities currently hold £26 billion in reserves or equivalent to the annual income of the sector.000 do not have a reserves policy!  Charity Commission found that £5.

What are Reserves? ³The resources the charity has or can make available to spend for any or all of the charity¶s 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  The live line 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 Explanation to enable the charity to meet its obligations (e.g. 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 Budgeted change Unexplained variability Special projects Capital funding . 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.

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

It¶s about why and articulating it! .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.

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  Analyse existing funds  Review future income streams/ assess reliability and significance  Review committed expenditure and the controllability of it. .

Risk Based Approach Cont¶d 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 Cont¶d 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 Cont¶d 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 charity¶s 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 .

and  Who else needs to understand the reserves and how they are structured.  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.  Needs to be aligned with income and expenditure patterns.Reserves  Don¶t confuse size with liquidity.  Understand the split between restricted and unrestricted funds. .

Reporting Tools of the Trade  Business plan or corporate plan  Budgets  Management reports  Financial statements  Cash flows  Project budgets  Forecasts  Key performance indicators .

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

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 .

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

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 .

‡ Turnover is vanity. 1+1=2 . ‡ Profit (surplus) is sanity. ‡ Cash flow is reality.Simple is Best  Understand in detail the components of your charity¶s cash cycle and how they affect your longer-term capital requirements  Do not confuse profit (surplus/deficit) with cash flow.

Swindon.Copyright 2007 Charity Business. Euroway. Unit 1.freeman@charitybusiness.com Visit our website at: www.com . Blagrove.charitybusiness. Wilts SN5 8YN Tel : 01793 554200 Fax : 01793 554239 Email: mark.

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