Some random thoughts from the field
Blog
for people centred, mission led, financially sustainable small charities
Happy New Year folks.
To celebrate, we bring you 3 things we would love to see more of and 3 things we would love to see the back of in 2024 when it comes to building financial sustainability in small charities.
Liz Pepler, January 2024
Ok. Let's Go.
INs
1. A good finance system
What do we mean by system? Recording, reporting and decision making. What do we mean by good? A budget to give us the shape of the year in numbers. A bookkeeping system which tracks grants and reserves and a monthly variance report. Are we on track? Are reserves going up or down? A year end forecast. Where do we expect to be come year end? A forecast for the next 2 or 3 years. What is the shape of things to come over the next few years? What do we need to do now to support us over the next few years?
Not sure where to start? We recommend the budget and the bookkeeping. Crack those and you are probably well over half way.
2. Good financial planning
All of that work is meaningless unless we digest the numbers and use them to inform our decision making. Grants underspent? Do we need to increase activity or extend the life of the project? Reserves going down? Is this intentional and affordable? If not, what remedial action might we need to take?
Not sure where to start? Diarise two days per month for the numbers; one looking backwards, one looking forwards. It might not take this long. Fantastic. Use that spare time for something else. Not investing proper time in financial review and planning is not an option and something that rarely ends well.
3. Space
Those leaders we work with who do build financially sustainable organisations build space into their operations and into their numbers. They are ambitious but they don't overstretch to the point of breaking. They have head space, energy and capacity to flex when needed. Building space in our organisations starts with building space in our budgets. Are we structuring ourselves to generate a surplus? Do we have contingency budgets? Do we have time to think and learn?
Not sure where to start? The Lloyds Bank Foundation's Organisational Resilience guide can help when it comes to building space. Organisational Resilience is about leaning into the unique value that we add to the world and choosing to model a culture of abundance. It is about rejecting the corrosive ideals of colonial industrialisation, about learning to rest and restore, about saying no rather than yes, about doing less rather than more. As said by one charity leader OR graduate, 'I have come to view Organisational Resilience as an act of resistance, as an act of organisational self care,'
OUTs
1. Lack of strategic clarity
We are often asked to build financial recording and reporting systems for small charities. It becomes clear very early where there is strategic clarity and when there is strategic soup.
Strategic clarity is being able to convey the mission and strategic activities undertaken to deliver it succinctly and clearly. In a charity where there is strategic clarity it is fairly easy to build a recording and reporting system that enables informed decision making. In a charity where this is lacking it can be really rather tricky. In fact, I would go as far as to say that it's just not possible to build financial sustainability in a strategic vacuum.
2. Paperclip accounting
We are often approached to help to clarify and simplify the financial reporting. There is a lot that can be done often with a simple summary page pulling together a few key numbers and tracking them in some clear and easy charts.
Sometimes however the financial recording in the bookkeeping system is fiendishly complicated. This can be partly due to SORP. Accounting rules for charities are not simple. But it can also be down to the fundraising. In the same way that the finance system is a mirror of the strategic delivery of the charity it is also a mirror for the fundraising practices.
If the fundraising budgets are very detailed and projects are cross funded by several grants then all of this will need to be reflected in the finance systems often making them overly complicated. When looking to simplify the finance system often we need to look not only at the organisational strategy but also at the fundraising. Together, strategy, fundraising and finance are a formidable team. Think big, think long term, think only as detailed as you need to be. Don't over complicate.
3. Restricted funds.
Also ...
We recently received an appeal for funds from a social enterprise which had an apologetic tone when explaining that some of it might have to go on finances which they termed boring. Such a shame.
And finally ...
Never forget that today is always a very good day for getting on top of the finances.
Onwards and upwards friends.
Everything, Everywhere, All At Once
Aka
The Future Is Unwritten
Aka
Solving small charity structural deficits
Liz Pepler, March 2023
Everything, Everywhere, All At Once.
Awesome film. I fell in love with it. The endless possibilities. The wonder of the multiverse. The chance that somewhere out there I too have hotdogs for fingers. Michelle Yeoh. Wow.
And because I am a bit of a workaholic, whilst watching it I was reminded of several charity budget meetings I have been in lately. Meetings where we have pondered, at length, the many, varied combinations of income, expenditure and reserves. The deliberations over what we should deploy when to get us through the year. Honest, open soul bearing conversations regarding confidence levels in our abilities to keep pushing back the financial cliff whilst still delivering support to beneficiaries week in week out.
Evolution v Revolution
For me, these discussions are crucial when navigating the short term. Because, although, ultimately, most of us need to end up with just a couple of versions of the financial futures ahead of us - a best version and a worst version say – in order to agree on these and have any shared sense of what the most reasonable versions of these are, we need to review – and then discount – all the other possibilities.
When planning for the long term however these discussions are even more crucial. Because while there are some financial challenges which can be resolved with evolution and implementing a few tweaks here and there - better cost recovery, incremental increases in income, a couple of new grants - there are many that cannot.
If we have been doing this for some time already and we are still staring the cliff edge in the face, then we need courage to lead our charity to boldly go where no Board or Exec team has gone before. We may need revolution rather than evolution. A whole new version of making social change happen.
The Future is Unwritten
And so, when dealing with deep and stubborn structural deficits our job is not to narrow down the possibilities but to go as wide as possible and think very firmly outside of the box. If charity as usual isn’t working we need to rethink our charity entirely. Which is hard work. Intellectually hard. Emotionally hard. It requires space and time to think the unthinkable. And it also requires trust to be able to imagine without censure or repercussion. Hard work.
I am fortunate to be in a couple of these imaginal discussions right now. Working with amazing charity folk who are all committed to imagining everything, everywhere, all at once, so that we can start to revolutionize how we work so that whatever we do we do it in a sustainable, equitable, impactful way. But probably, regrettably, still in this universe, without the wonderful hot dog fingers.
What does good growth look like?
Liz Pepler, February 2023
There are two questions I think about a lot.
How do you start and/or lead a people centered, financially sustainable, mission brilliant non-profit that makes a positive and meaningful mark on the world?
And
How can you do that and harness the power in being small and replicate what you do to build a wonderful mutually empowering fully sustaining coral reef of social change?
🐠
How to create social impact is well proven. How to do that over the long term in a financially stable way? Less so.
A common solution is a trading arm to generate unrestricted income. Done well, this has real potential.
It is not without risk though. A trading arm has the potential to de-rail a small charity.
What then, does good growth look like?
This book, How big things get done by Prof. Bent Flyvbjerg and Dan Gardner, looks at what makes and breaks megaprojects and much of it reads across to charities:
01 The master builder - social purpose orgs often start with a founder with a head full of vision, a heart full of stubbornness and a body full of energy. Trading arms also need a champion. Someone who gets business models and is comfortable with the profit principle.
💚
02 Get the team right - for financial sustainability the master builder is never enough. We also need deep experience of enterprise and risk management. In the team and on the board.
03 Ask why - We all need a guiding star to stop us going down the inevitable, very tempting, rabbit holes. The North Star of a trading arm is profit. That is the primary - though not sole - determinant in the decision making. This is a different way of thinking for many charities.
💡
04 What is your Lego - My favourite new mantra. Small really is beautiful. Get the trading working on a small scale and you can do it again and again and again. Change the world one beautiful Lego brick at a time.
🔸
05 Think slow, act fast - Not new but still true. Trading arms are not without risk. Most start-ups fail. Manage the risk by failing as much as you can in the planning phase and then deliver fast.
🐌 🐇
06 Watch your downside - In fat tailed projects which a significant trading arm could well be - unmitigated risk is big enough to result in devastating impact on a small charity. Don't stop at talking about the risk, actually manage it. This will involve a spreadsheet.
🦕
There are other considerations too. Interested to hear, what good growth of small charities looks like to you?
#SmallCharity #TradingSubs #GoodGrowth
I am often told that there is too much uncertainty and too little time for small charities to plan financially for the future.
I am not so sure.
And I value my sleep too much not too. Liz Pepler, February 2023
I am having many conversations with small charities at the moment about how to plan in times of financial uncertainty.
At the same time, I am hearing that the financial future is causing sleepless nights.
For me, the two are linked.
The problem with planning
I am often told that there is no point planning because:
a) It is not possible to see the future at all.
I think I agree with this, but only a bit.
We do know when grants and contracts are coming to an end (contracts maybe less so, they do often roll on while local authorities prepare to launch tenders of course) and we do know what our financial commitments are, staffing, rent, heat and light etc. So we can plan financially a bit I think.
Knowing the difference between our committed expenditure and confirmed income is a good thing to know. Knowing how this impacts on cash is an even better thing to know. Managing cash is the most delicate job of all when managing uncertainty.
Once we have the shape of our secured income, committed expenditure and expected cash balances we can start to get the shape of our financial risk. And once we have the shape of it we can start to manage it.
b) There are too many financial futures to see and we have no idea now which one will come to pass so there is no point wasting time now on things that might not happen later.
I think I agree also with this but, again, only a bit.
Oftentimes, there are some things in our possible financial futures which will have quite a potentially hard gravitational pull on our financial position, a new multi year lottery bid or a new local authority contract or our landlord has made noises about potentially selling our premises. Or our all important mini bus might be dying.
We can, most of us, I am inclined to think, describe the 2 or 3 most likely versions of the future. Maybe one is our business as usual version, two, what things look like if the big things happen and three a version in which everything comes true.
To manage uncertainty, we need understanding
The likelihood, of course, is that none of these exact scenarios will come to pass but already we have a baseline from which to navigate as things start to firm up. Being able to make real time decisions and not have to start from scratch every time when things are changing quickly is often the difference between solvency and insolvency. Between existing and not existing. Being there for our beneficiaries and not being there.
As a self confessed over planner and lover of spreadsheets, I will always forecast and Gantt chart everything (are there really enough rice crispies for all of us for the whole week? Do we really want to run that risk?)
The limitations of planning
At the same time, I have to ask myself, if we wait for the planners to green light everything after the numbers have fallen into place, would any social change happen at all?
Maybe the answer is, as usual, somewhere in the middle? To prepare for the worst - knowing that whatever happens we have the resources and conditions to cope - and plan for the best forever marching onwards and upwards in our quest to make people's lives better and communities stronger?
Pretty sure that planners sleep more
What I do know is that at least some financial planning is a good thing. As do most leaders who we speak to who have also experienced first hand the very real, very deep worry of guiding an organisation through serious financial difficulty.
A brilliant bookkeeper I know talks of financial planning in terms of sleep credits. For every hour we spend bringing understanding to uncertainty we gain an extra hour of sleep. And if I am honest, this alone, is enough for me. Good leaders sleep first and all that.
ChatGPT may well be my new best friend.
Does anyone want to employ me just to hang out with it all day? Liz Pepler, January 2023
ChatGPT may well be my new best friend.
It is happy to chat endlessly about charity finance.
It never gets bored or goes quiet or slowly walks away or starts reading a book.
I asked:
Do restricted funds build financial sustainability of recipient charities?
It said:
'Restricted funds may not necessarily build financial sustainability for the recipients. They are usually designed to be used for specific programs, projects or initiatives, which may not be enough to provide long-term financial sustainability for the charity. Often times, restricted funds are limited in duration and may not be renewable after a specific period. However, unrestricted funds can help to provide a more sustainable source of income, allowing the organization to plan and budget for the long term.'
Yes, yes, yes!! Does anyone want to employ me just to hang out with it all day?
Joking aside, I find it truly baffling why so many funders still place restrictions on their grants. I also find it baffling why so many funders are so reluctant to fund core costs.
Two measures almost guaranteed to create significant financial difficulties in small charities at some point.
So it was good to see a report on ukfundraising.co.uk
requesting that the Charity Commission get involved to encourage funders to consider the challenges that restricted funding brings:
'Problematic grant making processes are holding the sector back, a new report has warned, with the Charity Commission urged to take an active role in helping to improve things.'
This is likely to be a hotly contested issue. Many think the sector's regulator has teeth enough and would do well to interfere less in operational matters.
Others, and I include myself in this, are more of the view that anything that finally moves the dial on this archaic and corrosive funding practice is worth doing.
The toxicity of restricted funding is a hill I will professionally die on. It creates far, far many more problems than it solves. The time has come to recognise it for what it is, the Nestle of the funding sector, and put it to bed once and for all.
Afterall, even the robots agree.
When asked how he knew so much about the human condition, Leonard Cohen said, 'I don't. I just look at the person next to me and say, hopefully, it's that way right?'
Our job, as leaders of small organisations, is not to have all the operational, technical, regulatory and strategic finance answers ready to hand. Our job is to ask the right questions and build the support network to find the right answers together.
Liz Pepler, December 2022
When leading a small charity it can often feel as if we are expected to have all the answers to all the questions.
When these are finance questions, it can feel a bit overwhelming. For good reason.
Many questions require a technical knowledge we don’t have the budget for. Many relate to compliance which can be difficult to stay on top of. Many again are strategic and require a good understanding of how use our numbers and manage our risks so that we take decisions that deliver us towards and not away from a sustainable and resilient future.
All those many day to day micro decisions, and the more occasional more significant macro decisions, come through our financial statements like rings on a tree.
Throw in limited resources, increasing need etc etc and it can start to feel a little stressful.
In large organisations, we would have a whole finance function. We might have 2 or 3 or more employed staff who specialise in different areas of finance.
We might have 2 or 3 finance specialists on our board. We probably have a Treasurer. We may well have budgets for professional advice and guidance for those less routine questions that come up.
We would certainly have systems that have been customised to our needs and which produce our reports in just the way we need them to give us the insights making sound financial decisions much easier.
Much of this - if not all - is beyond even the dreams of small charities.
What to do then?
Well, first up, it is helpful to remind ourselves that there isn’t a leader out there who has all the finance answers to every finance question. They just don’t exist.
Even the many highly qualified amazing finance professionals that we know in larger organisations readily admit that often they won't have all the answers. Many have budgets of their own to supplement their own expertise with specialist finance support.
And they run things past their peers for a sense check. So much of finance work is subjective and every subjective decision requires more than one brain working on it to get the best solution.
Our job then is not to have the answers. Our job is to ask the right questions. Simples, right?
Well no. We hear, almost daily how it is difficult even knowing which questions to ask.
And so, we offer you two useful resources as a starting point to come up with your own, no doubt, much smarter questions.
This is our view of what finance might look like in a small charity. The detail will be different for every charity but, broadly, we have three jobs:
- nailing the systems and processes
- nailing the decision making
- nailing the financial leadership
Together these make for a financially confident organisation and it is financial confidence, ultimately, which builds financial sustainability and financial resilience.
We recommend sitting down with the Finance Universe, ticking those boxes you have confidence in, deleting those you don’t need and starting to find the smart questions about those boxes you are unsure of.
The Organisational Resilience guide
This is a fantastic resource designed by small charities for small charities.
It contains questions banks - relating to our three jobs above - which can help us start to form smart, practical questions to build our financial resilience.
And to work through some of these questions with peers, why not join one of our free workshops or peer mentoring sessions. Join our newsletter to get notified about 2023 dates.
To outsource or to not outsource? That is the question we are asked nearly every day.
In all honesty, there is no right or wrong. Both can be brilliant.
What is important is that as soon as you feel you need more support with your financial management, take that step.
Charity finances can quickly become spaghetti soup which, if left untangled, can even more quickly become a gordian knot.
Invest in support when needed and you will never incur the stress and cost of a big sort out job. More, importantly, you will be able to sleep night.
Liz Pepler, December 2022
We are often asked whether it is best to outsource the finance function or employ someone to do it in-house.
It's a tricky one.
In an ideal world, all small and medium charities would have the resources for a fully operational in-house finance function. Someone who has been or can be trained in charity finance. Someone who has time to double triple check, to think things through. Someone who has a decent budget for a decent system and a decent source of professional advice and guidance.
We are sure this exists somewhere. We just have no idea where.
So, given that most small and medium charities struggle to find a budget for the perfect finance function (and for the avoidance of doubt, this is for perfectly valid reasons mostly beyond our control, aversion to core funding, demonisation of core costs yadda yadda), what are our options exactly when building a finance function?
We think that rather than start by jumping straight to the in-house or out-source question, it can help to start with thinking through the finance jobs that we need to do.
Many small and medium charities have some skills in the mix somewhere. In this case, a third option, a hybrid approach can work really well.
What finance jobs do we need to do?
Most small and medium charities need:
🍁 Someone to do finance administration including payments, banking, gift aid claims etc
In our opinion, the day to day finance admin jobs are best done by someone in house. It is often quicker and more accurate.
More importantly, it is also more secure. Financial controls are important and cannot be easily outsourced. We recommend keeping on top of the controls by checking against this Charity Commission checklist.
🍁Someone to do the bookkeeping and keep good financial records
This is best when it is done monthly and done well, which is to say, it is complete, accurate and timely.
If this person exists in your organisation, fantastic. Having the data managed in-house is by far the better option in our view. Learning how to do bookkeeping can be a good way for a team member to skill up. We have provided external supervision to many people learning to keep the books up to date. For small and medium charities it can be a great low cost way to get a great bookkeeper. For the team member it is a skill for life. Happy days.
When this isn't possible, outsourcing - with clear processes and a lot of communication - is a good second best.
When outsourcing, we will need someone who knows where to allocate and apportion all the income and expenditure firmly in the mix. This might be an administrator. It might be the leader. This is a crucial link.
🍁What system works best?
At the end of each month, download the monthly bank statement. Add columns and note which income or expenditure category and which grant/fund each transaction relates to. Send it to your external bookkeeper by the end of week 1. Ask them to do the bank reconciliation in your system by the end of week 2 or 3. Review the profit and loss report and the balance sheet and finalise with a monthly sign off meeting. Simples.
🍁Someone to do payroll
For us, outsourcing payroll is a no brainer. Yes, there is a cost but given how technical and regulated it is and how important it is to get right it is actually an investment in your team.
🍁Someone to prepare monthly financial reports and present a clear financial position
Sometimes, when we are small and the finances are simple we can simply present the income and expenditure and balance sheet straight from our bookkeeping system. Therefore, whoever does the bookkeeping is best placed to do the monthly reporting.
When there is greater complexity, lots of fund accounting, forecasting, budget analysis etc we may need more specialist finance skills. it can be expensive to recruit these to an in-house post. In this case, outsourcing can be a fantastic way to get high level specialist support for a fraction of the cost of employing a senior finance manager.
When working with an external finance support, invest time up front in agreeing the content and the format of the reports. We have shared some thoughts on what makes for good financial management reporting below.
And also invest time each month to talk through the reports so that you understand the stories behind the numbers. What is going on here? Does this look right? Does this look ok? What happens if ...?
🍁Someone to prepare year end accounts and manage the independent examination process
Charities (which aren't companies) with an income <£250k pa can prepare receipts and payments accounts. These are fairly straightforward. The Charity Commission has a good template and guidance note here. It might be that these are readily done in-house.
Once income exceeds this - and if we are charitable companies - we need to prepare accruals accounts. These are more complex. We recommend outsourcing to a suitably qualified professional. A set of compliant , good looking accounts can really help with fundraising. It can pay to get a professional on the job.
Not sure what you need to prepare? Check on this Charity Commission diagnostic here.
🍁Someone to lead on financial strategy, risk, compliance and planning
This is done at Board level with the CEO. These are core ingredients of the Trustee and leadership role.
This doesn't mean that the decision to out-source the financial management is down to the Executive. Not at all. Trustees are jointly and severally liable for the financial management of the organisation. They can delegate the delivery but they cannot delegate their overall responsibility. Whether the finance function is done in-house, out-sourced or there is a hybrid solution, the Board needs to be satisfied all jobs are done and done well.
🍁So which is best?
In all honesty, in our experience, there is no right or wrong. We have seen small and medium charities do it all in house brilliantly. We have also seen outsourced solutions work brilliantly too.
What is important is that as soon as you feel you need more support with your financial management take that step.
Charity finances can quickly become spaghetti soup which, if left untangled, can even more quickly become a gordian knot. This is almost guaranteed to rob you of sleep, peace of mind, a calm life. Not only that, keeping the finances in good order as you go is so, so much easier than doing a big sort out job once they have gotten out of hand.
Invest in support when you need it and you will never incur the cost of a big sort out job. More importantly you will retain all important sleep credits and peace of mind and keep services going. This is priceless.
Trustees Week 2022, Eeyore and Tiggerandmy favourite fraud story of recent times
Liz Pepler, November 2022
Yesterday, I had the pleasure and privilege to reflect on what it means to be a Trustee and Treasurer in times of change at the Annual Hertfordshire Trustee Conference hosted by Hertfordshire Community Foundation and #TeamHerts Volunteering
My key take aways:
🎇 Look up and out - we don't know - with precision - what change is coming but as the great man sings, the times, they are always achanging. All we can do really is to keep on looking up and looking out. The longer the runway the better. When managing financial uncertainty, time is our best friend, friends.
🎨 Show me, don't tell me - your forecast is probably not my forecast. It is judgement after all, albeit a rational, thoughtful one. I can talk most predicted surpluses down to a deficit within a matter of seconds. I joke. Kind of.
But, it is worth bearing in mind when we are looking up and out, that some of us are tigger and do so with a rosy glow and see only sunlit uplands, others (guilty) are more Eeyore, get up, expect the worse and nod to ourselves when the day ends noting it went fairly reasonably after all, given everything, we suppose etc etc.
A forecast without a spreadsheet isn't a forecast.
🐬Be aware - of ourselves. The perfect Trustee doesn't exist. We will be sub optimal sometimes.
So given that, how will my unique blend of character defects (overly intense, annoyingly stubborn and generally using 100 words when 1 will do) risk making this particular decision sub optimal? And how do I adjust how I work to mitigate this?
💜But also, be aware of others. How are people doing? Making change happen with limited resources and ever increasing need in a world of uncertainty is tough. Are we looking out for each other? Do we have a tribe? There is loads of brilliant Trustee support out there Association of Chairs, Honorary Treasurers Forum, Getting On Board to name just three.
Anyways, I shall leave you with my favourite fraud story of recent times.
☔️An Ops Director receives an email from a CEO's email address asking for a same day £££ transfer. It all looked legit. Except that the message purporting to be from the CEO didn't say please. Which was so far from reality it was immediately spotted as a scam email and fraud was neatly averted.
Happy Trustees Week all.
Not sure of your fiduciary duties? No problem. Grab a coffee and a doughnut and start here with the Charity Commission's Essential Trustee and Charity Commission's core syllabus. Both clear, simple, straightforward reads. Want to dive deeper? This is also one of my go to guides Charity Commission guidance on Managing Financial Difficulties . Top tip, this one is best read when the sun is - relatively - still shining.
We often say that a good finance system will tell you when you have a problem. A really good system will buy you valuable time to fix it. There is no system good enough to fix it for us. We have to do that. But how do we know when we have a problem? Liz Pepler, November 2022
We often say that a good finance system will tell you when you have a problem. A really good system will buy you valuable time to fix it. There is no system good enough to fix it for us.
Management accounts are a key element of this system. They tell us what the numbers are and, done well, they start to tell us the stories behind the numbers.
Doing management accounts well will vary from organization to organization.
What are management accounts?
Management accounts are financial statements that we prepare either monthly or quarterly.
They are prepared so that we can tell how we are doing financially.
Unlike annual accounts which are prepared in accordance with set rules – and therefore should all look the same – there is no hard and fast rules for management accounts.
If we look at 10 sets of annual accounts all ten should be similar in layout. If we look at ten sets of management accounts, they will probably look quite different to one another.
Having said that, there are common pieces that make for informative management accounts:
• Income and expenditure report for the financial year to date – this will tell us where our money has come from and what we have spent it on. Ideally, we want to know this on a grant by grant basis. That way we can keep on top of our grant reporting, and we can track reserves during the year.
• Actual v budget with variance analysis – if we prepare an annual budget and/or grant budgets (and arguably most small charities should do both, yes, even if they are out of date the minute the ink dries) then we should be comparing our income and expenditure for the financial year to date to what we expected it would be when we put together our budget.
Understanding where there are variances and why helps us adjust our plans so we can stay within budget or depart from budget in an intentional and resilient way.
• Balance sheet – a balance sheet totals all our assets and liabilities and tells us where our income and expenditure has landed – in fixed assets, in the bank, or sitting in an invoice waiting to be paid! – we should always prepare a balance sheet and we should know every number on it. Easier said than done perhaps but it is time well spent as it tells us where a lot of our financial risk is.
Also, and not least, including a balance sheet in our regular management reports helps build our confidence that the accounts are complete (though not necessarily accurate!).
When prepared for the same period, the surplus/deficit on the income and expenditure account will match that on the bottom of the balance sheet.
The above, for me, is the bare minimum. Taken together I have a fairly good ides of the distance travelled. But, to be resilient, we need to go further. We cannot look at the past alone. We need to look to the future too. To do this, we probably also need:
• An actual v budget forecast to year end – by projecting forward we can start to estimate what our reserves are likely to be come year end. This is important. It’s fine to spend excess reserve, providing it is intentional. Accidentally spending reserves, it not a great place to be as a small charity. They are simply too difficult to build up in the first place.
• A cashflow forecast – cash and income/expenditure do not behave the same. Yes, we need a budget but we also need to predict when the income and expenditure in our budget is likely to hit our bank account.
If you would like to explore how we can help you prepare management accounts in your small charity, please contact us. We love to talk finance and would love to hear from you.
'Planning for the best, preparing for the worst'
Liz Pepler, October 2022
Has anyone else lost count of the number of times they have thought this these past few weeks?
It’s not a new thing of course. I have been thinking this, or a less polite version of it, for the past 20 years, on and off.
It’s not a surprising thing either. Small charity business models have precarity baked into them. If what we do and how we do it turned profits, the private sector would be doing it. If it broke-even, then, maybe, the public sector would be doing it. A crude comparison for sure but with a grain of truth, I think.
So, no, it’s not new and it’s not surprising that financial sustainability is firmly on many agendas.
What is surprising is just how many small charities do manage to survive and how many manage to even thrive. How do they do it?
Well, from what I seen, and heard and learnt, it is a mixed bag.
Some leaders tell me it is because they have been able to generate unrestricted funds, subsidize contracts and build reserves.
Others put it down to being strong on costing, full cost recovery and securing generous income contributions from grants.
One leader told me that in actual fact they might look sustainable but deep down she knows it’s an illusion created by the fact that project years and financial years don’t neatly align which results in cash balances which gives the appearance of financial sustainability (more common than we recognise this one).
A couple of leaders have mentioned that actually they have just got lucky with an unexpected windfall, which both recognized to be wonderful, but probably not, in truth, a sustainability strategy.
From what I see, there are two necessary - if not sufficient - conditions.
One. A clear and well-articulated organizational strategy. Building sustainability in a strategic vacuum is just not possible. We can muddle on for a while, get lucky for a bit, but eventually the cracks start to appear in the numbers.
And, two, whether it is vocalized or not - and often it is isn’t - all have a pretty good grasp of their business model.
When it comes to building financial sustainability, we only have three levers; income, expenditure and reserves. We need to understand how all three interact with each other and understand how they relate to mission to really be able to take decisions which lead to a more sustainable future.
Financially sustainability is, to my mind, a top-down, bottom-up job. Yes, we need to need to be on top of the costing and the cost recovery, but we also need to be on top of our business model and how the two fit together. And timing of grants and happy unexpected donations certainly don’t hurt.
Onwards and upwards. Onwards and upwards.
If you are planning for the best and preparing for the worst and want to talk this through with likeminded friends please join us for our upcoming 2 hour working session on financial sustainability.
These days, it is difficult to wake up in the morning without being reminded that there are financial storms coming. It's frustrating. After the past two years, a break would be nice. What then, can we do now to build our organisational resilience for the times ahead?
Liz Pepler, September 2022
We have read the research (or the Executive Summaries at least), we have seen the headlines, we have listened to the news. There are financial storms heading our way. Rising fuel prices. Rising inflation. Decreasing donations. Increased demand on services. We are already depleted from the past two years. And now we need to ready ourselves again.
On one hand, I take great comfort from the fact that small charities are pretty much as resilient as it gets. On the other hand, I worry for colleagues and friends having to navigate yet more difficulty. A break would be nice.
So, what , if anything, can be done now to check in on our resilience for the coming months?
The good news, is that there is a lot we can do. And it is all fairly simple, standard stuff.
When it comes to building organisational resilience, we have, really, just four jobs:
1.find our north star and map a course
2. check in on our boat and stock of supplies
3. check in on our people and their working conditions
4. keep an eye on the weather and change course when needed
Job one
Find our north star and know where we are headed
Charities and social enterprises are social purpose organisations. We have seen something in our world which we are dissatisfied with and want to change. Over time, the many pushes and pulls exerted on us by external forces, can slowly tug us away from our path.
Keeping our ultimate destination fixed in our mind – all our minds – helps us take big strategic decisions and numerous day-to-day micro decisions – and remain – largely - on track.
Knowing where we are headed and whether we are on track or not is essential when leading a resilient organization. It is simply not possible to build financial resilience in a strategic vacuum.
A key purpose question we can ask ourselves now before the clouds come in later in the Autumn is 'how sure are we that our current priorities are the right ones given what we are here for and what’s coming up ahead?'
If, in the pandemic we had a mighty push and took on lots of new programmes, now is a good time to review which are core to mission and which are nice to have.
Our North Star is our core programme of support. Do we have agreement on what this is, where the boundaries lie and how it is funded? If we had to reduce down for a while, do we know what we would keep on doing and what we would pause?
Job two
Build a boat which is seaworthy and well stocked
It's easy to have a good idea to change the world. Working with many start-ups, we see good ideas every day. Making them financially sustainable over the longer term so that they breathe and live is less easy.
In short, financially resilient organisations understand their business model and their numbers.
Their business model may not be entirely water tight but they know how to plug any leaks so that it can stay afloat. Reserves are key here.
Also, their supplies may not be fully stocked with the right mix of income and expenditure but they know how they act together and are on top of the tensions this creates.
There are most probably as many business models as there are charities and social enterprises. We don’t fall neatly into easily defined typologies. And in terms of the numbers, well, precarity is pretty firmly baked into them. And how these play out will be different for every organisation.
However, there are commonalities and most smaller organisations have high grant dependency, high fixed costs, low certainty income and low reserves which makes for a turbulent passage.
Job three
Check in on our crew. What do our people need from us?
Our third job is our most critical job. Getting our crew together and nurturing the conditions needed so that we can all do the work of change together whatever the weather be it squally waters, calm patches or brewing storms.
Often times, when financial trouble blows in, things get tense. We feel the pressures of time. Things turn downwards unexpectedly quickly. Our minds are fixed on the numbers. If we have come to them too late, as is often the case, it can be a very emotionally charged time. The decisions we need to take come thick and fast and we don’t always feel we have time enough to look out for our people; our beneficiaries, our volunteers, our staff, our trustees, ourselves.
Social change starts with people and ends with impact. We need to do everything in a people first way or there is no point doing anything at all.
It is all too easy to forget this when things are tough but it is how we treat people when delivering social action that is the true measure our success.
Key people questions to ask - are we confident that we meet people where they are and create the conditions they need to thrive? Do we have work to do here?
And, on a practical level, do we have a sunset budget? In the unlikely event that we need to wind down can we provide for our beneficiaries, our staff and our volunteers if we need to close a project or our organisation? Have we done the dry run?
Critically, are we confident that no matter what happens. no matter how hard it gets, we can navigate it all with due respect and radical kindness?
Job four
Keep an eye on the weather
We are all in the same storm but we are not all in the same boat. Some of us will be more affected by what's happening outside than others. Most of us will have reduced visibility. We will all need to prepare for a bit of turbulence. Have we done the hard work in shaping our most likely scenarios ahead?
Getting one step ahead, while the sun is shining, thinking through the most likely routes ahead and determining the shape of the boat, the supplies and crew for each one, will be something we will be very thankful for when the storm clouds roll in. We will look back and thank our younger, wise selves kindly, for giving us the space to think when we most need it.
Resilient organisations don’t just forge on regardless hoping it all be ok. They pause, they look ahead, they think through options, they get on the front foot, and then when the time comes, they expand or contract as needed in order to sail on with their people first, purpose led integrity intact.
Are we confident that we are able to expand and contract as and when we need to in a people first, mission led way?
What now
When building resilience in times of uncertainty, we need to be a 4 out of 5 on all four fronts to be confident that we are able to the challenges ahead:
- We all know our North star
- Our boat is water tight
- Our crew is well
- We have checked the weather
Building a resilient organisation is hard. It is not for the faint hearted. But then the work of social change is hard and not for the faint hearted. We probably wouldn't be here in the first place if it were easy.
If you think there is work to be done, and you need a little extra support thinking it all through, this guide is full of great questions to ask when assessing our organisational resilience.
You can also book onto our Organisational Resilience Workshop in September to explore what this means for your organisation.
We all have an iceberg
somewhere out there on our horizon. Something, which, if we don't take corrective action will take us way off course, or worse, have the potential to sink us. Our job, as leaders, is to continually scan the horizon, locate it and set a course to sail around it maintaining supplies whilst looking out for the crew. Simples, right?
Liz Pepler, December 2021
This year we have had the privilege of listening to hundreds of charity and social enterprise leaders. This is what we have heard:
1. We can't build a financially sustainable organisation in a strategic vacuum. We need to know what our destination is or we will never quite know whether we are on course or not. To set sail without knowing where we are headed is to risk mission drift, or, worse, possibly shipwreck.
2. We all have an iceberg somewhere out there on our horizon. Something, which, if we don't take corrective action will take us way off course, and/or sink us. Our job, as leaders, is to continually scan the horizon, locate the iceberg and set a course to sail around it maintaining adequate supplies whilst looking out for the crew.
3. We need to listen to our crew, really listen to what they say and keep them front and centre in all we do, without them we don't even have a boat and if we can't set sail living our values then we shouldn't be setting sail at all. Organisations which prioritise their corporate reputations at the expense of people are forgetting that how we treat people is our reputation.
4. We need to cherish our supplies and ensure we keep plenty of ballast. We need to take special care of those supplies which we can use at our discretion. Those which give us agency. Our reserves are vital and we ignore this at our peril. If we have them we need to be very intentional about when we use them. If we don't yet have them our job is to build them and maintain them. Yes, we know this is difficult but our job is to lean in and deal with it. We owe it to our beneficiaries, to staff and to all those who chose to work with us.
5. Finally, we need a compass. Something to guide us through the mists of the pandemic uncertainties ahead so that we can emerge the other side purpose led, people centred and financially resilient
6. It can be hard to build a compass that captures all of this but together we do have many of the answers. We know this as we have worked with many, many brilliant charity leaders this year doing just that; working together, sharing learnings, finding the answers, building the compass. Check out our learning opportunities to find out how you can too.
Four questions start-up charities and social enterprises can ask themselves to build financial confidence
Liz Pepler, July 2021
🗺 Are we sustainable?
Sustainability is built top down and bottom up.
Does our business model enable us to generate the income we need to change the world in the way that we want to change it?
Have we calculated the full cost of delivering our world changing activity?
Do we know how much money we need to bring in to cover costs and break-even?
And to generate a surplus and build a reserve?
In short, do we have a budget which maps the income and expenditure profile of all our activities so we can plot a course through the unknown waters ahead?
🌊 Are we solvent?
Cash acts differently to income and needs monitoring separately.
Will the cash be received when we need it so that we can pay our bills when we need to?
Do we have a cashflow forecast?
Cash is fuel, do we have the fuel we need to get where we need to go?
⚡ Are we compliant?
We are entering a fairly (SocEnt) or highly (charity) regulated bit of the economy.
Are we confident we know what we need to do and when we need to do it to comply with the relevant regulatory bodies?
Do we have good financial governance?
All boats need a crew. Does ours have the technical toolkit it needs to steer the boat safely and compliantly?
🧭 Are we resilient?
We all have an iceberg somewhere on our horizon.
Are we able to spot the iceberg and change course to navigate around it?
Are we able to expand and contract - with intention and with integrity - when needed?
We all need a compass which shows us where we are headed.
Do we have some simple financial metrics to guide us?
🌈Starting a charity or SocEnt is tough.
Building a financially confident one even tougher.
Those that have the calmest waters, we find, are those that bake the financial governance and management into their operations from day one.
Yes, it can be scary, intimidating, boring even at times but leaning in and embracing the finances will be the gift that keeps on giving, we promise you.
Tools for building financial resilience. Some thoughts from the field. Liz Pepler, January 2021
'Organisational resilience is the ability of organisations to anticipate, prepare for, adapt and respond to incremental change and sudden shock in order to survive and prosper.’
Cranfield School of Management
One thing right now is certain. The year ahead will be uncertain. It will also be a year of challenge.
It is unsurprising then that many of us are focusing on our organisational resilience and our ability to weather the upcoming challenges. All while demand on our services is increasing and many of us are feeling the strain. It can be hard to know where to start.
Those organisations that are resilient, that is, those that are able to anticipate, prepare for, respond and adapt to change, are those that are clear about their purpose, invest in the resilience of their staff and keep on top of their numbers. In doing these things we stand a far greater chance of building the relationships and generating the income we need to keep delivering the services our beneficiaries rely on.
We need to be realistic. It can take time to build our organisational resilience. There are many factors at play and not all are within our control. Happily though, there are tried and tested ways(1) of building our financial resilience which, in turn, can build our organisational resilience.
While we are often strong advocates for outsourcing the technical side of the finance role - time is short etc. etc. - there is still significant advantage to be had in being on top of the strategic side of the finances. So whether you have an in-house or out-sourced finance function there is serious benefit in starting the conversations below.
Multi-year planning
Do we have sight of our income and expenditure expectations over the current year? And the year to come? Do we know what our cash balances are likely to be and if they are sufficient for our cash needs? As one of my (brilliant) former Treasurer's used to say, one of our main jobs in charity finance is to look around the corner. Doing so buys us valuable time to spot any icebergs on the horizon and adjust our course accordingly. Yes, the crystal ball gets bigger the further forward we look but even ballpark figures can give us greater control over our steering. Multi-year planning is essential for helping us to anticipate when change will be required.
Active Reserves Management
Does our reserves policy need to be dusted off? Was it set many years ago and remained the same ever since? Have we plumped for an arbitrary 3m or 6m? If yes, don’t worry, you are not alone, and it probably served well pre-pandemic. Now though we may wish to be a bit smarter and adopt a tiered approach. Think Maslow’s hierarchy of needs. Start with quantifying legal commitments (potential redundancies and other contractual liabilities) then add other risks such as drops/gaps in income, or upcoming costs, then add a contingency buffer to allow you to flex when needed. Are our actual reserves way below this new smart target level? Again, you are not alone.
What is important for resilience building purposes is to commit to building our actual reserves towards our target reserve over a period of time. Even if it takes years. Add a dedicated expense line to the budget and stick to it. It's tempting to retrofit the target level to the actual level. I am sure many of us have done this. There are benefits, but when we are building resilience we need to be active about every pound.
And while we are on reserves, do we calculate our reserves position at year-end only? Keeping sight of fluctuations within the year can help prevent sustainability – and potentially solvency – issues arising. By undertaking monthly management accounts, structuring them so that they report on both restricted funds and unrestricted funds and including our funds brought forward from the previous year, we can keep track of our reserves position in real time, keeping us aware at all times of how much coal we have in the furnace. This is essential for responding quickly and adapting services with confidence.
(1) https://ssir.org/articles/entry/building_financially_resilient_nonprofits_lessons_from_the_field
Early warning indicators
Do we have a plan B and do we know when to enact it? When we face several possible futures preparing – and budgeting likely income and expenditure and cash needs - for alternative scenarios helps us respond quickly when the need arises. After all we will already have done the lion's share of the thinking and we will all be on the same page. This speeds up the decision making when we most need to act quickly. In all honesty, I think we are pretty good at crafting our Plan Bs. And plan Cs, Ds, Es etc. After all, the entire purpose of our working lives in this sector is to overcome challenge, navigate obstacles, change the unchangeable. More often than not, we have plans Bs aplenty. What we often lack are the early warning indicators and decision-making processes to enact them to avert disaster in good time. Identifying
when
adaptation needs to be enacted – when our reserves reach the trigger level to prevent us dipping beneath our agreed minimum level for example – is good preparation which, like much good preparation, will hopefully end up being a waste of time because disasters will be averted through other means.
Intentional risk management
Do we really manage our risk? Or do we just have a massive risk register in really font? One of the key elements of active risk management when building financial resilience is a robust understanding of the tensions within our business model. For example, if we have high fixed costs and low certainty income, we will need a more generous reserves target to manage this risk than were we to have low fixed costs and high certainty income. If this financial buffer feels unachievable in the time period ahead we may need to consider rebalancing our fixed costs to bring them more in line with our income expectations. These are not easy discussions to have. Having the 'what if' discussions when things are ok is much easier than when things are tough. Being on top of the key risks and having indicators not only builds a shared risk tolerance it also helps us adapt and respond to change in a timely manner.
So what now?
Many of us will be doing these already. For some of us, there is work to do, but it's no biggie, a few tweaks to a spreadsheet here, a board agenda item there. For others, this will feel slightly daunting. Don't despair.
The place to start is with the bookkeeping system. In finance, all roads lead to bookkeeping. Does it track unrestricted income and expenditure? If not that is often the place to start. This is relatively easy with a package like QuickBooks. Crack that and you are probably nearly 70% of the way there.
If the bookkeeping is already sorted, move onto the management accounts. A few tweaks and you can easily calculate mid year reserves. Then comes the board agenda item to review reserves. And finally, some indicators. It may feel like a lot, but what we - and others -find that there is power in this approach, a greater control over the numbers.
Even doing one of these (and we normally recommend the order we have just outlined) can significantly strengthen our resilience. Doing all four - multi year planning, live reserves monitoring, tracking indicators and active risk management - has an even greater benefit far bigger than the sum of the parts. It lifts board discussions. It makes us focused. More strategic. More impactful.
Our experience tells us that there is no magic bullet when it comes to building financial resilience. Even an unexpected windfall can, at best, on its own, just buy us time.
To build short- and long-term resilience we need to be on top of and stay on top of our numbers. Doing this, even imperfectly, may just give us the ballast to ride the waves when the waters become choppiest.
Financial Resilience for Charities
26 January 2021, 2-4pm
£15
Small charity cashflow forecasting. Some notes from the field. Liz Pepler, April 2020
I can think of several periods in my professional life when I have had to navigate tricky cashflow situations. It's not a fun place to be. At times, it has been stressful. But the stress can be reduced I find. Here’s how I stay on top of the numbers (to some extent) and the stress (also, to some extent).
On the upside, while much of the financial management cycle can feel like the dark arts, to those whose first love is not numbers, cashflow forecasting is more accessible. It's a far simpler affair to put together a cashflow forecasting spreadsheet than it is say, getting your head around double entry bookkeeping, or, let's be honest, navigating charity VAT exemptions. There is a standard template, it follows logic and it doesn't need an in depth knowledge of accounting concepts. Plus, most of us have lots of personal experience to draw upon. We are, or have all been, at some point, cashflow experts.
On the downside however, when we are unable to put the right numbers in the right place, it often means that there are difficult decisions on the horizon. In any organisation this is tough. In small charities where the line between management and staff, between colleague and friend, and between all of those and beneficiary is often blurred, these difficult decisions can redefine tough.
What can help alleviate the pressure that this brings, is, I find, getting on top of the numbers and staying on top of the numbers.
Here's how that looks to me:
1. Get a template. If you don't have one already, don't reinvent the wheel. Download an existing template. Try here https://www.caplus.org.uk/cash-flow.
2. Customise the template. Any financial management tool works best when it fits our own charities. I customise the headings to match my own income and expenditure budget headings. It makes it easier to keep it up to date going forward.
3. Choose the month that your cashflow will start. I often start with the previous month so that I have one month's data to play with. It's a good way to test the spreadsheet and to get familiar with it.
4. Choose the month that the cashflow will end. I would choose 12 months. The crystal ball will get bigger as we go forward into the future of course but even guestimates can help identify pinch points and alert you to when you need to remedial action. As each month passes, I extend the forecast forward a month.
5. Add the opening balance. Take the opening bank balance from your bank statement or live bank feed and enter it in the opening balance cell.
6. Add the budget. This acts as a helpful completeness check once you have the income and expenses entered. If you are already part way through the year and only have 6 months left of this year's budget, then you may want to pro rata the budget numbers. Ideally though, in this type of situation, your forecast will extend beyond the 6 months and give visibility over the next 12 months, if at all possible. In all honesty, if I don’t have reliable budget figures to hand and just need to work out when we will run out of cash, I skip this bit and go straight to the next.
7. Add the income for month 1. Remember, we schedule the income when we expect it to come into the bank account. Donations can be tricky of course. Is there data from last year that you can use to guestimate regular donations? Grants should follow the payment schedule that you received when the grant was confirmed - if unsure check with your funder. Events may well not go ahead in this climate but if they do schedule the income when people are expected to pay - in advance, on the day, by invoice afterwards etc - rather than when the event takes place.
8. Add the expenditure for month 1. Again, it is when we expect it to hit the bank account. Salaries will be monthly normally. HMRC contributions by the deadline in the following month. Rent and utility direct debits will be on a similar day each month or quarterly. N.B. If we have no idea at all we can often glean a lot from what happened last year. Sometimes, we need to call suppliers to check.
9. Check the closing balance. After doing the first month, I would get my calculator out and check the numbers to make sure the formulas haven’t been corrupted. Opening balance + income - expenses = closing balance. N.B. the closing balance in M1 should be the opening balance in M2.
10. When you are happy that the formulas are correct, continue with the remaining months. As a rule, if I am unsure, I take a prudent approach, overstate expenditure at the soonest it could hit, understate income at the latest it could arrive.
11. Now comes the tricky bit. Stand back and review the closing balances. They should be positive. If there are negative balances on the horizon, and you don’t have an agreed overdraft (with the bank or trustees), remedial action will be needed. In all honesty, this looks different in different organisations. Some agree with suppliers to delay payments or pay larger ones in instalments. Some talk to funders and agree for the next grant instalment to be brought forward. What I wouldn’t do is delay or skip statutory payments without appropriate prior approval.
Over the years, I have made the following mistakes that I would be keen not to make again:
1. Not extending the forecast far enough into the future. We need as much visibility as we can get. Don’t be put off by going into the red. Every single charity on the planet will most likely do this at some point. It’s about knowing when that happens for us and what we can do to avert it with minimal harm.
2. Not keeping it up to date. It’s easy to update the current month and not keep future months up to date but to do so risks double counting income and expenses. For example, if a grant instalment is early, be sure to delete it from the future month in which you originally had it scheduled to land. Otherwise you will inadvertently overstate income. Being on top of a cash flow forecast means updating it regularly. Sometimes daily.
3. Confusing income with receipts and expenditure with payments. Remember, it’s not when we raise or get the invoice necessarily, it’s when we expect it to hit the bank that counts.
4. Not acting soon enough. If we can see the iceberg, we need to turn the ship around. The Covid 19 curve graph helps here. With leadership intervention we can often reduce pressure just enough to get us through. Everything in my experience tells me that acting earlier rather than later is better, but timing is tricky, I am the first to admit.
5. Delegating it to one person only. Cashflow forecasting in times of uncertainty and scarcity is stressful. Much of it is judgement. Sharing the burden reduces pressure and improves decision making. Fact. Sharing the overall picture with the board and the day to day detail with the most senior decision maker is how I have done this in the past. At times, I have also arranged confidential, professional, peer review to help test the spreadsheet and to challenge the assumptions. This has caught many a misstatement, helped me keep grounded and built my own confidence in the numbers.
There is more I could write but blogs have an attention span that I have already exceeeded. If you are a small charity in need of free, confidential, professional support to get your cashflow forecast up and running, please do get in touch. No-one but you is an expert in your charity and its financial position and truth be told no-one can do this for you, but assistance with excel, peer review and gentle challenge on assumptions can often go a long way to relieving some of the pressure.
Finally, remember, not all heroes wear capes, some manage the cashflow forecasts of small charities so that they can continue to make people’s lives better and their communities stronger. Dramatic but true. If that is you, I salute you. You are gold dust and your small charity is lucky to have you, at any time, but particularly now.
Charity financial resilience. Not rocket science, just very, very difficult. Liz Pepler, March 2020
Like many other charity finance professionals, I spend a lot of time thinking about financial resilience; what it looks like, how to get it, how to keep it when we have it. The ability to withstand change, when it falls upon us, is important now more than ever. Much in the external social, political and economic climate is uncertain and the direction of travel suggests that, if anything, we are in for greater short to medium term uncertainty, not less.
There is a lot written about how to build a resilient non-profit organisation. Studies and reports exist aplenty. One example might be the CAF resilience team who have identified 6 criteria: purpose, impact, leadership, networks, awareness and being financially and organisationally fit. Another example, which I use often, is the SSIR approach which aims to ground the theory of resilience in three practical principles: multi-year planning, strategic use of reserves and the use of dashboards.
All eminently sensible. After all, most of us can see the benefits of focusing on longer term forecasts rather than on annual budgets, on the balance sheet as well as the income and expenditure statements, and on strategic metrics as well as spreadsheets full of numbers. As one teenager said to me recently, duh, it’s not rocket science.
The question then is why are so many charities still struggling with resilience? For the most part, these organisations are not led by people who don’t think, read, talk about it. Nor are they run by people who know it and think it unimportant. There must be something else at play.
When I ask charity leaders what would make them more resilient, I am told over and over that the main constraints are too little time, too few people and too little money. Spending the lion share of my working life in and with these types of organisations, I understand this; I live the frustration of these very constraints myself. Managing within these constraints on a daily basis leaves precious little time and energy to invest in the strategy, systems and processes needed to even start to build resilience.
The problem is that no single charity can resolve these constraints on their own. For the large part, these internal constraints are often created by external pressures; the politicisation of central costs leading to an under investment in financial systems, the prevalence of short-term funding resulting in myopic planning processes and a complex regulatory framework contributing to a lack of financial confidence.
To alleviate some of the internal constraints then we need to relieve some of this external pressure. Maybe what is needed is no less than systemic change from the institutions that make up the rich tapestry of our sector. A co-created, unified and jointly accountable shift in the way that charity funders, sector regulators, sector advisors, infrastructure bodies and charity leaders work with, talk to and relate to each other. Perhaps only then can some of these external pressures be eased and some of these internal constraints relaxed.
So no, building financial resilience in charities is not rocket science but it is very difficult and it takes more than the efforts of charities alone.
Liz Pepler, February 2020
I am often asked how might small charities (income sub £1m) generate more income. I am also asked how might small charities achieve sustainability.
I find these questions difficult to answer. Not because they are complex questions that require a good understanding of an organisation, which they are, and do of course. But because, if I am honest, these are the wrong questions to open with.
There are 167,000 charities on the register. 97% of those have an income sub £1m. Yes, many will be in a position to use all their assets and talents to become sustainable. Many can, if they really work it, grow and thrive. But just as many again I would hazard, will only ever survive. And, if they are meeting a vital social need, in the face of increasing demand and relentless scarcity, then that is an enormous achievement and needs celebrating.
Many of the charities I have in mind are working to address wicked problems, in communities with multiple social challenges, by delivering front line services to meet acute need. Even a cursory glance at their latest accounts paints a stark picture. Many are running on empty. Few to little fixed assets. Painfully thin reserves. Grant dependency.
Yet, year on year, they survive. Largely because, what is lacking in physical assets is made up in human energy. These organisations are led, managed and run by people who leave me in awe at their leadership and organisational skills, at their understanding, compassion and human insight.
To expect many of these
organisations to become financially sustainable and generate substantial earned income levels, is in all honesty, expecting the
planet’s temperature increase to magically revert back down to pre-industrial
levels.
It would be fantastic, yes. But it’s just not going to happen. Sometimes, a lack of sustainability is baked into a charity's very being.
Of course, we can argue the merits of such a model but if one of the roles of the charity sector is to pick up the failings of the state and catch those that fall through the net of welfare state provision, then arguably, these organisations always have, and until different socio-economic models prevail, always will, exist.
Far better then to start with the question, 'What type of funding model do we have as an organisation and what does it looks like when it is optimised?'
If the answer is one that leads to the possibility of sustainability or growth, then great, now we can ask 'and how is sustainability to be achieved?' Income diversification may well be part of the answer. If, however, the answer paints these as pink unicorns, then we need a strategy that does not waste limited resources by having us chasing an unattainable goal. What we need is one that maximises our social impact whilst managing the inherent risks - and stress - that come with leading these types of organisation.
The boundaries and typologies for doing social good are changing. Charities now operate thriving social enterprise arms. Social enterprises now provide services once the sole preserve of charities. I welcome these shifting sands, optimistic that what is emerging is for the wider public good.
So I say it’s ok to be a social enterprise delivering public good. Just as it is ok to be a charity with rosy reserves, respectable remuneration and a growing balance sheet.
And, I also say, if a charity is part of the fabric of its community, working day in, day out to make people's lives better and their communities stronger, despite the many challenges, then it
is also very ok to be a charity in the purest sense, relying on grants and donations, and in doing so, surviving rather than thriving.
Why social impact leaders need to embrace financeLiz Pepler, January 2020
If you had asked me when I was little what I would like to do when I was big, I would have told you that I would like to build bridges please.
My young self was in awe of their size, the way they defied gravity, and their beauty. From the Millau Viaduct in France to the Pooh bridge in Hartfield, I love them all. My appreciation for bridges especially includes the bits I can't see. The many, many numbers hidden in the foundations underneath.
Though, truth be told, what I love most about bridges is that many years ago, when the first bridge was made, it was because someone, reaching a ravine or a river, didn't just think 'oh, well, that's that then' and turn back. They thought, 'ah, ok, no problem, I can fix this'.
In the end, my career took a different path and I fell into charity financial management. It's a welcome move, and, there are similarities. Social impact organisations, like bridges, are built by determined people finding clever solutions to real world problems.
And, like bridges, social impact organisations need strong foundations. They survive and sustain, in large part, due to the numbers being the right numbers. Of course, strong financial management is necessary rather sufficient; there are many other things required to deliver social impact such as strategic planning and delivery, effective governance, the right kind of leadership, service delivery expertise, but numbers, whether we like it or not, play a key part.
Yet all too often the numbers are considered an add on, a necessary evil, a resented overhead. I have some sympathy with this, even if I am an overhead myself.
People are busy and don't have time enough to meet all the demands on services let alone time to review the hidden truths in a set of financial statements. People often prefer words to numbers, and if numbers are presented in a way that obscur these truths, we can't blame people for not seeing them. Sometimes, people are fearful of numbers. Understandably so, numbers have a capacity to expose a lack of understanding that can feel rather brutal. And even finance's most loyal fans can find some aspects of financial management wearisome. So little wonder that financial management can be given short shrift in time pressed charities.
The problem is, that having worked with over 100 organisations over the past 20 years, I have learnt two things to be true beyond doubt. Firstly, financially resilient organisations are underpinned by strong financial management. Secondly, strong financial management happens when leaders embrace it. Embracing finance is essential if we want to survive as an organisation. Yes, there are many organisations which appear to be just fine without embracing finance, but in all honesty, I think this is often down to luck, which runs out eventually. Organisations that are truly resilient and can ride out the inevitable challenges that present themselves along the way, pay attention to, and invest in, the financial management.
For reasons already well documented by others, many charities are facing increasing need and increasing scarcity of resources. To make the numbers work, we need strong foundations. We need to embrace finance.
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