- Step 1 understand your funds, the split between restricted, unrestricted, endowment etc
- Step 2 review future income streams, identifying which streams are continuing into the future, which are shorter-term and risks associated
- Step 3 review of committed expenditure, look at expenditure patterns and the extent to which the charity can curtail or change the timing of cash outflows
- Step 4 develop a risk-based policy, taking into account the reliability of income, the extent to which expenditure is committed, as well as the major risks to which the charity is exposed. Consider the following:
- What is the amount the charity should hold as working capital? A cashflow forecast is needed to establish the level of funds needed to cover the natural pattern of activity
- How much is needed for contingency? The cashflow forecast should be ‘stress-tested’ by questioning the assumptions underlying the forecast. What if the expected funding arrives a month late?
- Are there specific liabilities that need funding? If you have to make additional contributions to a pension scheme or pay off dilapidations on a lease, then you may need to quantify these liabilities and create designated funds to cover them
- How secure is your income? As described in Step 2, you will have a better idea of the risk profile of your income. For example, if your charity receives thousands of small donations from many people, the risk profile is lower
- How committed is your income? As described in Step 3, you may be running services that have high levels of fixed costs, which raises your risk profile.