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 charity’s 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 backward-
looking, 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 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
Breaking the Strategy Down

1. Immediate needs

2. Short Term requirements

3. 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

Business/
corporate
plan
KPIs Budgets

Financial M’ment
TOOLS
Statements Reports

Cash Project
Flows 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 - Reduce numbers of

suppliers, cycles of payments;

™ 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 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

™ In the event that everything goes the wrong way!

The main reason is the worries about income variation!

Summary of Reasons

Reason for Reserves Explanation

Closure to enable the charity to meet its obligations (e.g. paying its
creditors) in the event of winding up the charity

Prudence to provide a minimum level of cover as best practice or a rule

of thumb

Budgeted change to provide cover beyond the minimum level to cope with
expected changes in activity levels and/or timing differences

Unexplained to provide an additional level of cover which attempts to cover

variability unexplained (or unforeseeable) variability in income and/or
expenditure streams

Special projects to provide additional finance which enables the charity to fund
special projects on an ad hoc basis

Capital funding 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.

It’s 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 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
Reserves

™ Don’t 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

charity’s cash cycle and how they affect your
longer-term capital requirements

™ Do not confuse profit (surplus/deficit) with cash

flow.

• Turnover is vanity,
1+1=2
• Profit (surplus) is sanity,

• Cash flow is reality.

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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: [email protected]