To develop a sustainable financial strategy, charities must avoid costly short-term thinking and fully understand how their business model impacts their financial decision making…
Charities and not-for-profit organisations continue to face challenges in ensuring they uphold their reputation and secure their longer-term sustainability. As you will have seen within recent press, the external pressures for increased transparency for the sector are not only growing but can also lead organisations into the headlines. Damaging reports in respect of any area of an organisation’s operations show the direct link between a non-financial reputational incident and the very real financial implications.
Any threat of financial insecurity can result in costly reactive and short-term thinking, whereas taking a broader, longer-term view of a situation can provide charities with much needed stability and even present new opportunities. However, developing a financial strategy that will ensure sustainability can take time and will involve many different aspects for an organisation to work through.
Understanding your business model
Stepping back and thinking about the key factors that determine how the organisation operates is the vital first step to take to ensure that everyone is starting from the same place. Some key questions that can support this process are:
- What is 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 last question is arguably the most important and yet it is often overlooked. For charities, there is often little or no relationship between the two and this is a primary cause of financial instability.
The spending of funds to preserve the generation of income is also 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. This expenditure may not be desirable from a funder’s perspective, but 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 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.
Establishing an appropriate strategy
The final consideration is for organisations to come up with an appropriate strategy that outlines how it takes them from their current situation to where they need to be. The charity 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.
Another option is to diversify the charity’s income streams. This option usually requires high levels of upfront investment and effort which may also include longer lead time before results come to fruition.
Some may 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.
Be aware of external factors
Lastly, charities also need to be aware of any external factors that may be outside the organisation’s control that would force a change in strategy. The move from grant to contract and performance by results arrangements is a prime example. Charities need to adapt their financial and business models to facilitate these changes or decide they cannot provide the services in the way they wish to under the new arrangements and walk away from them.
Every charity is different but each one needs a good financial strategy in place as a starting point. With a solid financial strategy in place, charities can implement their plans and be confident of a sustainable future.