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Trustee Conference AM3: Overseeing charity finances

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presentation from Trustee Conference, 7 November 2016

Sarah Ramsey, BWB
Kathleen Britain, Barclays

to find out more about our events, go to https://www.ncvo.org.uk/training-and-events

Published in: Government & Nonprofit
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Trustee Conference AM3: Overseeing charity finances

  1. 1. Drinks sponsors: OVERSEEING CHARITY FINANCES : REAL LIFE GUIDANCE FOR TRUSTEES SARAH RAMSEY & KATHLEEN BRITAIN 7 NOVEMBER 2016 Partner sponsor: Media partner: Lead sponsor:
  2. 2. This session will provide practical guidance and share real life experiences to help trustees understand their charity’s finances, ask the right questions, and ensure the pertinent issues are discussed. The objective is to help Board members in achieving the right balance of financial oversight and risk management with maximising social good, ensuring the organisation’s resources are used to best effect.
  3. 3. Sarah Ramsey Associate Director, BWB Impact & Advisory Services An experienced COO / FD /advisor for a range of charities, social enterprises and NGOs. Specialising in strategic planning and change management, social impact and sustainable financial models. Recent MSc research includes a study of entrepreneurial leadership within non-profit organisations. s.ramsey@bwbllp.com Kathleen Britain Director, Head of Charities, Wealth & Investment Management Barclays Wealth and Investment Management A financial partner within the UK charity sector previously as a funder and now as a financial specialist. Kathleen provides strategic and operational insight to the trustee boards she sits on, as well as support on fundraising and investment management. Kathleen.britain@barclays.com
  4. 4. WHAT ARE YOUR OBJECTIVES? AS A TRUSTEE REVIEWING CHARITY FINANCES Effective use of resources A specific Board role?
  5. 5. A DYNAMIC FAST CHANGING ENVIRONMENT • Evolving role of the State and Brexit • Prolonged austerity and significant demographic shifts • Shift from grant to contract culture Earned income now accounts for 55% of charity revenue • Digital revolution  Need for agility, responsiveness and resilience Increasing and changing needs for services Drive for bold, calculated risks (NPC, E3M) Wide ranging social entrepreneurial activities
  6. 6. “pursuing a social mission through pursuit of new opportunities, by continuously innovating and adapting, acting boldly without being limited by current resources, and demonstrating accountability to constituencies” (Dess 1998) Social Entrepreneurialism
  7. 7. SOME BIG PICTURE QUESTIONS Are we horizon scanning - anticipating and responding to changing needs, opportunities and risks? Do we truly understand our business model, and are we realistic about future income direction? Are we innovative, developing effective solutions, plus adapting or stopping services which are no longer a good use of resources? Are we taking action early, building the needed skills/culture, relationships and track record? Don’t unconsciously wait for a burning platform!
  8. 8. THE ENABLING FRAMEWORK Do the Board and Management Team have the needed skills, experience and up-to-date knowledge E.g. Commercial skills, Bringing in of up to date sector knowledge Is our strategic and operational decision making framework timely and responsive? - Information flow and decision making approach - Board and Committee Structures, Roles and Terms of Reference - Level of delegated authorities - “Managerial wisdom” Are we encouraging an innovative, autonomous, learning culture, within strong governance systems and processes?
  9. 9. CHARITY COMMISSION GUIDANCE • An era of increasing public distrust, media scrutiny and stakeholder scepticism • Trustees are the “guardians of purpose” with a duty to act in the best interests of the charity and protect and safeguard its assets • Trustees “must engage with finance guidance” (Jan ‘16 updates) - CC12 : Managing financial difficulties and insolvency in charities - CC19 : Charity Reserves – Building Resilience - Charity governance, finance and resilience : 15 questions charity trustees should ask • Challenge is to focus on impact as well as risk balancing boldness and innovation with stability, resilience and regulatory guidance
  10. 10. ENSURING FINANCIAL RESILIENCE • Review and challenge cashflow forecast assumptions Probing of income certainty and timing Distinguishing between restricted and unrestricted cash (with pragmatism) • Ensuring level of reserves is appropriate for what you are enabling and/or protecting against New opportunities, drop in income levels, loss of particular contracts Orderly wind-up – level of commitments (staff, pensions, leases) • Diverse income streams and commitment timeframes • Efficient cost base, full cost recovery, value pricing • Sound investment and asset management decisions
  11. 11. CONSIDERING FINANCIAL OPPORTUNITIES Is our financial expenditure aligned with our strategic priorities and impact or should we redirect resources? Would mergers, acquisitions or collaborations help maximise collective resources? What is the need for growth or investment? Would additional fundraising or borrowing assist in achieving the organisation’s strategic objectives?
  12. 12. THE GROWTH PARADOX Does Growth now = Increased financial exposure? Contracts and Joint Ventures => Increased Risk Payment by results => Higher working capital requirement A duty to grow is achieving sustainable, social impact? “Why invest in fundraising which gives 4:1 return when we can borrow the money cheaper and not have the distraction?”
  13. 13. FINANCIAL PLANNING IN UNCERTAIN TIMES Build in adaptability to allow responsiveness to opportunities and problems as they arise Holistic decision making process for opportunities and unexpected issues outside of the annual plan Consider traffic lighting of initiatives and expenditure e.g. projects, new staff Understand your cost base with a transparent P&L Review salary commitments and central functions costs, together with their growth trajectory, Clarity on organisational costs which are covered by unrestricted income Scenario planning – determine impact of different events to understand risk profile and
  14. 14. FINANCIAL OVERSIGHT QUESTIONS How secure are the components of the income budget/forecast? What variability is there in the cost base? What overhead recovery /profit margin is being achieved on grants and contracts? What is the fundraising return on investment? What are the key variances against budget and why? What are the risks in our cashflow forecast? What are our key financial risks? What is our long term outlook and risks?
  15. 15. THE HUMAN FACTOR On whom are we reliant within the charity: • For information? • For controls ? • For expertise ? • For decisions ? Do we trust them? • What’s the right level of trust and how do we build that? What happens if they’re not there?
  16. 16. LESSONS FROM SOME CAUTIONARY TALES • The importance of looking at multi-year trends of income, core costs, staffing costs and reserves • Not to rely on a few key funders, including patrons/close supporters • To develop and test new income streams well in advance of need • To ensure reports compare actuals with the approved budget rather than reforecasts • To provide appropriate “critical friend” challenge of the FD, without undue trust • To ensure the FD has the appropriate skills, experience and personal qualities for the role, and is focussed on strategic issues • To ensure reporting is transparent, with finances understood more widely than one or two people • To widen Board/SMT communication beyond the CEO, but without over-attendance at Board meetings
  17. 17. FINANCIAL CONTROL KEY QUESTIONS 1. Who is signing off major purchases and multi year contracts? 2. Who has control of the bank accounts? 3. Who is signing off the payroll? 4. Is there an open dialogue between FD and Treasurer? 5. Are restricted funds being managed appropriately? 6. Does the Management Letter from the Auditors highlight any concerns? CC8 Internal financial controls document has a complete list
  18. 18. MANAGEMENT ACCOUNTS : 5 SUMMARY PAGES Transparent P&L Clearly showing staffing costs and core costs actuals and forecast compared to budget distinguishing unrestricted and restricted funds Balance sheet Clearly showing unrestricted, designated and restricted funds actual and forecast Cashflow – sample format follows Restricted funds summary – sample format follows KPIs – Key indicators and graphs
  19. 19. CASHFLOW FORECAST – SAMPLE FORMAT Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Unrestricted Cash Opening Balance 570,297 435,834 318,372 220,910 170,910 805,910 794,910 563,670 408,670 458,670 208,670 -41,330 Income line 1 20,000 20,000 20,000 30,000 50,000 50,000 30,000 30,000 30,000 30,000 30,000 30,000 Income line 2 0 0 0 0 50,000 0 0 75,000 0 0 0 0 Income line 3 30,000 10,000 0 200,000 800,000 0 0 0 300,000 0 0 0 Income line 4 33,000 40,000 0 0 15,000 219,000 18,760 20,000 0 0 0 0 Debtors Unrestricted 0 30,000 100,000 0 0 0 0 0 0 0 0 30,000 Core Costs -217,462 -217,462 -217,462 -280,000 -280,000 -280,000 -280,000 -280,000 -280,000 -280,000 -280,000 -280,000 Unrestricted closing balance 435,834 318,372 220,910 170,910 805,910 794,910 563,670 408,670 458,670 208,670 -41,330 -261,330 Restricted cash Opening Balance 387,000 647,194 707,388 587,582 567,582 667,582 877,582 857,582 1,037,582 1,017,582 997,582 977,582 Restricted Income line 1 300,000 100,000 0 0 120,000 230,000 0 200,000 0 0 0 300,000 Restricted Income line 2 200,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Debtors Restricted 0 150,000 0 0 0 0 0 0 0 0 0 0 Restticted programme costs -239,806 -239,806 -169,806 -70,000 -70,000 -70,000 -70,000 -70,000 -70,000 -70,000 -70,000 -70,000 Restricted closing balance 647,194 707,388 587,582 567,582 667,582 877,582 857,582 1,037,582 1,017,582 997,582 977,582 1,257,582 Understand level of certainty and conservatism of income forecast Alternative pragmatic method to assess unrestricted cash levels if systems do not make this easy is based on Unrestricted Cash = Total Cash balance – Restricted fund balance +/-changes to restricted debtors/creditor balances
  20. 20. FUNDS SUMMARY – A SAMPLE FORMAT Opening Income Balance Salary Direct Partners Restricted Funds Programme 1 104,257 170,780 35,520 59,457 182,000 0 -1,940 170,780 9,000 53,943 72,044 25,617 186,477 Programme 2 50,000 100,000 50,000 10,000 45,000 15,000 30,000 0 5,000 2,000 0 0 43,000 Programme 3 44,000 0 44,000 0 0 0 0 0 12,000 0 0 0 32,000 Programme 4 0 50,000 0 0 30,000 7,500 12,500 12,000 0 0 10,000 1,800 200 Programme 5 43,942 0 0 0 0 43,942 0 0 0 0 0 43,942 Programme 6 146,763 0 32,160 89,970 25,000 0 -367 0 18,240 40,612 0 0 87,911 Programme 7 29,814 93,451 41,080 61,000 0 14,018 7,167 73,451 11,540 20,060 0 11,018 60,647 Programme 8 138,483 128,389 81,082 160,000 19,258 6,532 128,389 37,709 15,796 0 19,258 194,109 Programme 9 0 249,096 64,096 110,000 0 37,364 37,636 65,489 18,518 50,471 0 9,823 -13,323 Programme 10 284,782 312,000 65,760 40,620 191,000 31,200 268,202 0 18,905 12,038 94,894 0 158,945 Restricted Funds Total 842,041 1,103,716 413,698 531,047 473,000 124,340 403,672 450,109 130,912 194,920 176,938 67,516 793,908 Unrestricted Funds 400,000 1,200,000 600,000 350,000 120,000 124,340 654,340 66,105 250,000 123,000 6,332 67,516 160,621 FUNDS TOTAL 1,242,041 2,303,716 1,013,698 881,047 593,000 248,681 1,461,684 516,214 380,912 317,920 183,270 135,033 954,529 Balance at 31.06.15 Income Costs ACTUALS AS AT 31.06.16 Partners Costs Forecast at 31.12.16 Salary Direct Contributi on to core Contributi on to core YEAR END FORECAST
  21. 21. FINANCE KPIS AND USEFUL CHARTS Potential KPIs - Admin ratio Free reserves (in months) - Fundraising ratio Useful graphs - income, core cost and reserves across years to see trends - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Thousands Grant Renewals Secured Pending
  22. 22. 15 QUESTIONS TRUSTEES SHOULD ASK GOVERNANCE, FINANCE AND RESILIENCE
  23. 23. KEY QUESTIONS Does the organisation have the funds it needs? Is the organisation spending its money wisely, on the activities it was raised for? Is it following the law, producing reports and accounts and sending to the Charity Commission? Is it meeting the rules in its governing document? ACCORDING TO THE CHARITY COMMISSION
  24. 24. FURTHER READING 15 Questions Trustees should ask https://www.gov.uk/government/publications/charity- trustee-meetings-15-questions-you-should-ask NPC’s “Boldness in Times of Change” http://www.thinknpc.org/publications/boldness-in-times-of- change/ NCVO’s UK Civil Society Almanac 2016 https://data.ncvo.org.uk/category/almanac/

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