Finance management might not be the first thing on your charity agenda. But it’s never been more important to start building towards a sustainable future
As organisations are responding to major crises and challenges, there is an element of charity work that will always be reactive by definition. The COVID-19 pandemic has made this clearer than ever. Faced with a sudden and unprecedented challenge to traditional methods of fundraising, event planning and service delivery, the sector adapted and embraced digital as a solution.
These ad hoc measures allowed charities to continue operations in difficult circumstances. But they were almost entirely unplanned, and never intended for the long run.
The sector now finds itself in a period of consolidation. Charity leaders must assess what has worked well, and what can work better, as they seek to optimise new digital processes whilst making tentative steps towards a more stable method of operating.
This period of transition is less abrupt than the last, and whilst the future may be uncertain, charities that begin making sustainable plans for the longer term will be in a better position than those that do not.
Finance management is unlikely to have been the first thing on the agenda for most organisations, as much of the focus on charity leadership over the last couple months has centred on the practical questions of digitisation: such as how organisations can make the switch to digital methods of fundraising and service delivery, as well as working out the nuances of managing a remote workforce for the first time. But with more charities than ever before competing for a shrinking pool of funds, the need for accountability to donors and stakeholders (both public and private) has made finance management a key issue for charity leaders planning for a more secure future.
The initial period of swift and total change is over. During these many difficult months of 2020, reactivity was the best chance that many charities had. As we begin to find our way towards greater stability, charity leaders must prioritise sustainability in their planning.
In this period of relative calm, organisations have an opportunity to consolidate — to develop infrastructure and start to operate strategically. This begins with building a financial blueprint. Sage and Charity Digital have conducted research into the current levels of Organisational Financial Literacy (OFL) in the UK charity sector. This research culminated in a framework designed to provide charity finance staff with the tools and expertise necessary to build this blueprint.
Our research indicates that impact reporting continues to be an issue in the sector - with many non-profitscharities’ annual reports failing to explicitly state their organisation’s financial performance indicators and objectives. This is supported by independent research already conducted on the UK charity sector.
This has a number of effects. For one, it leads to a crisis of accountability. Without detailed financial records, charities will be unable to provide transparency to stakeholders, both internal and external. This will put them at a disadvantage when applying for further funding. — This is more serious than ever with the funding crisis brought about by COVID-19, which sees an increased number of charities competing for a shrinking pool of funds.
Failure to produce timely and accurate financial reports can lead to an inability to forecast and benchmark for the future that makes meaningful financial planning impossible. Without providing detailed information on current financial performance charities non-profits will struggle to plan existing activities or pilot new ones. This, in turn, will jeopardise their future fundraising prospects, leading to further financial insecurity.
This is endemic of a reactive approach to finance management. It is an easy mindset for charity leaders to fall into. In an uncertain financial landscape, this approach may feel like the only available option. However, a planned approach can provide greater sustainability for the long-term, allowing charities to make decisions based on the financial data they have available to them now.
The more detailed your bookkeeping, the more financial data you will accrue. The more data you have, the more informed your decision-making and planning process will be, allowing your organisation to build a more sustainable future.
It all boils down to a simple question: is your organisation’s finance management reactive or sustainable?
A reactive model is just what it sounds like. Decisions are made as a response to changing circumstances, rather than as a result of prior planning. There may be no planning at all, or plans may be discarded or changed as a result of unforeseen circumstances. Organisations with a reactive model in place operate based on what has already happened.
When using a reactive finance management model, non-profitscharities are driven by the expenses of day-to-day necessities. Rather than planning ahead, they are always responding to events. If a fundraising event is cancelled or underperforms, finance staff rush to find a solution.
When stuck in a reactive mode, almost every financial decision a charity makes is determined in the moment. Leaders rarely take the time to think through the consequences, or consider the end game, making decisions based on the financial data available.
A sustainable model is the opposite of this approach. Charities with a sustainable model strive to operate within their means. They have a clear and accurate appraisal of the resources (financial and otherwise) at their disposal, based on detailed and timely impact reporting produced regularly.
This means that these organisations have a wide range of financial data available to them, which guides their decision-making process. Finance leaders of these kinds of organisations will find financial planning easier and more effective. Organisations with a sustainable model make financial decisions based on impact reporting of prior financial performance and goals set at regular intervals.
If a significant event occurs, these plans may be amended, but they will not be discarded. The most effective financial planning will build contingencies into plans, to account for obstacles and challenges wherever possible. These organisations may set revenue aside as a prudent reserve. This will take the form of a lump sum, set aside to cover operating costs for a set amount of time (e.g. one quarter, or one year). This will serve to tide them over in the event of a shortfall in revenue.
The most important step towards achieving a sustainable model is also the simplest - a proper budget! An effective budget enables organisations to identify the successful programs and activities that evidence good governance.
Our research highlighted a number of issues preventing charities from improving their financial planning and achieving sustainability. The most prominently-reported of these is capacity.
Many smaller organisations do not have dedicated finance staff. Instead, workers split the finance function with other duties within the organisation. This means that finance activities are likely to be neglected, or rushed. These workers are also likely to lack the proper training to fulfil the finance function successfully.
Our research also indicates* that these organisations are primarily using paper-based accounting methods, or simple Excel spreadsheet bookkeeping processes. These unsophisticated measures are appealing to time-poor organisations because they are easy to understand and get started with. However, they provide low value in terms of financial data-gathering. More pressingly, they are inefficient and are in fact much more likely to exacerbate capacity issues than alleviate them. These ineffective methods of bookkeeping can lead to costly mistakes. In the event of an error being made, the reliance on simple bookkeeping measures can prove a double-edged sword for charities. Not only will they be harder to rectify, they will also be more difficult to spot!
By automating core back office processes, charities can achieve two things. They can gather financial data more effectively, in order to build more sustainable plan. And they can address issues of capacity, allowing workers to optimise time spent on the finance function, whilst freeing up resources to concentrate on other areas, like fundraising and service delivery.
“NPOs need to be able to stop worrying and constantly focusing on the finances, let the right solution take care of that, and focus on value. Focus on the people (those who donate), the meaning and purpose of the projects, and ultimately the results achieved.
The ‘value’ of the ideas and the projects themselves will attract more people and donation, resulting in sustainability. A success cycle of building value, gaining more support (value attracts money), increasing resources (money creates capacity) and creating bigger, better ideas (capacity creates more value). Value attracts money.”
- Lois Laughlin - Practice Success Manager, Sage
In order to automate financial processes, there are several issues that must be addressed. If capacity is understood to be the primary obstacle to achieving financial sustainability, then the root causes driving these capacity issues must be overcome first.
The first of these root causes is a lack of finance training in the sector. By educating charity finance workers on how to use finance management software, we can lighten the burden on overworked and undertrained charity finance staff and begin to deal with the issue of capacity.
Of course, this educational element will not be helpful unless charities have access to this software. This access must be clearly signposted and affordable if it is to have a real impact on the financial sustainability of the UK charity sector as a whole.
Finally, a programme of social support will be crucial to charities looking to make the switch to a more sustainable financial model. This could take the form of a combination of peer-support and skills-based volunteering, with trained finance professionals from both inside and outside the charity sector offering their expertise to help guide a new generation of charity finance professionals.
Sage has created community forums for non-profits at Sage City to foster a culture of collaboration and support as well as announce opportunities for support and skills-based volunteering from Sage Foundation.
Download the Sage and Charity Digital OFL report here