Siân Eagar, WCVA’s Resilience Officer, summarises the key learning points from Gus Williams’ recent talk on financial management in the cost of living crisis.
As part of WCVA’s mini-series of webinars around the cost of living crisis, we invited Gus Williams, CEO of Bevan Buckland LLP, to talk to the sector about the importance of financial management and how this supports decision making.
The cost of living crisis is forcing voluntary organisations to make difficult decisions, given the pressures being created from rising costs, unpredictable income strands and increasing demand. WCVA’s work to support the voluntary sector aims to help organisations navigate these pressures and build resilience. WCVA defines resilience as:
‘The ability of an organisation to plan for, respond to, and adapt to change, enabling it to survive and thrive both now and in the future.’
A key element of building resilience is strong financial management, and Gus explained how understanding your organisation’s numbers will improve your decision making.
WHY DO VOLUNTARY ORGANISATIONS FAIL?
Gus began by outlining some of the common features that lead voluntary organisations to fail. Poor governance, lack of leadership, failure to act quickly or at all, and not being fit for purpose operationally are the common factors in organisational failure. Lack of cashflow is always the ultimate reason organisations fail but this should be seen as a symptom of leadership failing to act soon enough.
Whilst these are serious issues the point to note is that, despite the current economic gloom, well run voluntary organisations can still succeed.
WHAT DOES A GOOD ORGANISATION LOOK LIKE?
Good governance is key. According to Gus the best organisations have clear processes for decision making, effective allocation of roles and responsibilities and good communication channels with high visibility of information. Having a mechanism for everyone to raise queries and to escalate issues is also important as a way to identify and address problems early.
Sharing information is vital, as no one person knows everything that is happening in an organisation. No one person knows everything that is happening inside and outside the organisation, but everything that is happening is known by someone. Good governance and therefore good decision making depends on having the structures in place to connect the dots.
UNDERSTAND YOUR ORGANISATION’S NUMBERS
Gus recommends that you really get to grips with understanding your organisation’s finances. This is not just about knowing the figures, but really understanding what drives them. Gus says that whilst most clients will be able to tell him what their income or costs were last month or what your expenses were, it is knowing why that is important.
Your organisation may have a number of income sources – such as Welsh Government, grant funders, major donors or trading income. You need to consider how these sources of funding will be and are being impacted by a changing economic environment and plan accordingly.
You should also scrutinise your expenditure. As a starting point be clear about which costs are fixed and which are variable. Identifying the drivers of your variable costs is important so you can try to take action to manage or reduce them. For example your rent will likely be a fixed cost, it will be the same regardless of how many staff you have or services you provide. Staff costs may be either fixed or variable, depending on contracts, hours, overtime etc.
Variable costs are those costs that are dependent on specific activities or delivering your service. Understanding the marginal cost of each additional activity or unit of service you provide is important in understanding your break even – the point at which your costs will exceed your income. For example, if you are a charity providing support to individuals, what are the variable costs of supporting one extra individual.
If you are looking to cut costs then think carefully about the implications of those decisions both in the short and long term. Often investment or discretionary spending is the first thing to be cut. Things such as building maintenance, staff training, or technology upgrades may not seem an immediate priority, but cutting this spending could degrade your organisations future ability to deliver services.
Many businesses cut this sort of spending during hard times only to find that when things improve the lack of investment has left their products or services obsolete. The important issue here is investing in improving productivity or quality of outcomes.
WORST CASE SCENARIO
Once you understand the drivers of your income and expenditure you can work on scenario planning, assessing the impact on your organisation of a change in circumstances and work out how you would respond to that. By asking ‘what if…?’ you will be more alert to risk, more prepared, and can be proactive rather than just reactive.
TRACKING FINANCIAL PERFORMANCE
All organisations need to have in place a process to track financial performance. Information needs to be timely and accurate. What key information do you need and how easy is it to obtain? Ensure you have good processes in place to capture and report key information.
Gus explained that a single number on its own doesn’t tell you much. When looking at financial information it is the variance that is key to tracking what is happening.
- Your ‘Budget’ is what you plan your future income and expenditure to be at the start.
- Your ‘Actual’ is what your income and expenditure actually was.
- Your ‘Forecast’ is what, based on your actuals, you now expect your future income and expenses to be.
Looking at the variances between Budget, Actual and Forecast should highlight areas of concern and show the direction of travel. Variance should also look at the variance between things like this month and the same month previous years, this month and last month, and year to date this year and year to date last year. The importance of looking at a combination of variances is that it gives you a much better picture.
Remember that numbers on their own don’t tell you what is happening, but they will tell you where you need to look.
LAGGING AND LEADING INDICATORS
When creating your monitoring processes, Gus encouraged us to think about the things that can give you an early indication of the financial health of the organisation. You will need to be able to recognise both lagging and leading indicators:
- Lagging indicators look backward, after events have happened and assess the current state
- Leading indicators look forward, before events have happened and predict future conditions
Financial information is usually a lagging indicator – it only tells you what has already happened. Changes in behaviours are normally leading indicators, they give you an idea of what might happen in the future. Examples of leading indicators could be noticing fewer items being donated by the public to a charity shop. In a few months’ time you could see this change in behaviour result in reduced takings as your stock runs down and you have fewer items to sell.
Likewise, tracking the number of phone calls, queries, or visitors to your website could be a leading indicator that demand for your services will increase and allow you to plan ahead. Changes in staff behaviour can also be an important indicator. Deadlines being missed, staff off sick and feeling stressed can be important indicators that the organisation is under strain. Frontline staff will often be the first to see these leading indicators so good communication and feedback is crucial.
PRIORITISE YOUR PURPOSE
When facing decisions about how to allocate limited resources you should focus on delivering your core purpose. In good times it is easy for mission creep to occur, so review your activities and make sure that they are closely aligned with the organisation’s purpose and relevant to the current circumstances that you are operating in. Think about your desired outcomes and focus on the priority areas, looking at how you can maximise value for money and impact and deliver results.
Voluntary organisations are likely to face tough financial conditions for the medium term. Now is the time to ensure that your organisation is well run and prepared.
At the heart of every organisation is the question of how to prioritise limited resources. No organisation has unlimited resources, good leadership is making the right decisions to ensure those limited resources are clearly prioritised and focussed on the right things.
Bevan Buckland LLP are specialist charity accountants based in Swansea and South Wales. They are able to offer a range of services, such as accounts preparation, VAT advice, general tax advice, payroll services and work with a wide range of organisations from small community charities with turnovers of less that £10,000 up to national charities who work across Wales.
WCVA have created a resources page for the cost of living crisis, including a section on financial management.
For more information on management issues relevant to the cost of living crisis take a look at WCVA’s blogs about the importance of good fundraising decision making and top tips for decision making in a crisis.