During Mental Health Awareness Week (9-15 May)¹ I wanted to highlight positive actions charity finance managers can take to get on top of their finances and reduce their own stress levels.

As we emerge from the pandemic, there are undoubtedly still challenges ahead for finance teams including the cost-of-living crisis, the war in Ukraine and gaps in funding as a result of the past two years.

But the good news is there are proactive things charities can do to tackle these challenges.

Now is the ideal time to ask important questions to get a realistic picture of the current financial situation and understand what actions could improve things. Key questions include:

• How secure is our cash flow and how reliable is our forecast?
• What is the impact on funding, related costs and our project profitability?
• How do I reassure our trustees about our financial position?
• What can we do ourselves and at what point might we need professional advice?

Taking early positive action will help to secure the financial sustainability of your charity.

Understanding your overall business model

Next, break down your charity’s business model into key component parts to get a clear picture of any operational surpluses or deficits. This will help you understand the financial performance of every activity you undertake, and any funding restrictions.

Actions to consider:

• Analyse any activities by their financial performance and their strategic performance – are there any activities that are not important and perform badly from a financial perspective? If so, consider stopping these immediately.
• Be clear about any restricted sources of funding and what costs are linked to these. Should the funding cease, what would be the impact on your general funds in terms of meeting any gaps to continue projects or fund overheads?
• Create a funding pipeline mapping out key sources of funding and when these are due to end or be renewed. Ensure you have clarity over whether the source will be replaced or whether you need to consider ending these activities.
• Identify any sources of funding linked to performance conditions or a payment by results mechanism and if these would be impacted by any short or medium term disruption to the delivery of your charitable activities.
• Are there any activities requiring a substantial amount of investment?
• Link your risk register to the above and ensure you have plans in place to mitigate your key operating and financial risks.

Cash versus profit and impact of funding restrictions

Many charities plan ahead by looking at a budget for the forthcoming financial year. The budget is normally based on the income and expenditure expected on an accruals basis, so adjusted to reflect the year to which is relates, not necessarily when you would expect to receive the income or incur the cost.

Project financing can often be received in advance or in arrears. Restricted project funding may also be cash in the bank, but not available for general purposes. Therefore, the budget should be supported by a cash flow forecast on a pure receipts and payments basis which reconciles back to the cash in the bank. The cash figure should also clearly distinguish between restricted and unrestricted cash reserves.

Actions to consider:

• Review your budget and cash flow forecast to ensure that each one is clearly prepared on either an accruals or receipts and payments basis
• Confirm that your cash flow forecast splits your unrestricted cash resources and your working capital requirements can be met out of unrestricted cash alone.

Engagement of budget holders

Consider how engaged your budget holders are and establish if they are fully accountable for their budgets and understand the impact when budget variances occur. The impact of inflation is difficult to predict and will impact on budgeted revenue and your underlying cost base.

Actions to consider:

• Arrange a catch up with each key budget holder.
• Discuss any concerns and identify where budget variances are expected, where are the uncertainties and what is the probability of them arising?
• Identify any gaps you may need to pick up with another member of the team.
• Ensure these variances are built into any cash and/or profit forecasts.

Communicate and engage the board

Your trustees may be feeling concerned too and have their own questions around the financial position. Ensure you communicate the situation clearly to address their concerns and the board the assurance they need.

Actions to consider:

• Ask during the next board meeting if the information being provided is clear and accessible to everyone – does the board have any requests for extra information or a different presentation?
• Would it be helpful to provide a dashboard or other quick, visual representation of the financial position that can be easily updated on a regular basis?
• Is any training required on the analysis / trends shown by your key business drivers or performance indicators?

We hope these suggestions are helpful. For more useful resources on lots of different charity finance topics please look at our resource library.

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¹ https://www.mentalhealth.org.uk/campaigns/mental-health-awareness-week