Insights
Good financial management is not just an end in itself but should be aligned to the overall strategy and mission of an organisation
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Every charity needs a financial strategy, supported by well-documented, monitored and reviewed internal financial controls to enable them to operate day-to-day.
But this shouldn’t be set out in isolation. Financial procedures and the finance function must be aligned to the overall strategy and mission of the charity, to facilitate its effective operation and maximise impact.
In 2016 NPC asked what makes a good charity and stated that “money is a means to an end, but it matters: financial security and sustainability allow charities to focus on their mission. We need to be realistic about the environment in which charities work: resources are scarce and money often comes with conditions.”
Put simply, a charity cannot survive without income and a model that plans for the future, which is in tune with what the organisation wants to achieve. But equally, a charity’s overall strategy needs to be clear about what it is able to do and factor in the financial context and constraints within which it operates.
Building a charity that’s fit for purpose in an increasingly chaotic world begins with aligning the entire organisation, including finance, around the core purpose.
A charity’s strategy is set by its trustees, who also have an overall duty of care to ensure that the charity is well-managed. This includes a prudent regard for the organisation’s financial position.
Studies have suggested that trustees often equate stewardship with ensuring financial sustainability alone, rather than focusing on how it can enable mission and impact.
A 2017 paper by Bayes Business School found that while the funding environment evolves and there is significant pressure on, and competition for, funding streams including grants, donations, investment returns and contracts, many charities still felt confident in their financial strategy.
While some of these assumptions will have been tested by both the pandemic and the cost-of-living crisis, this mindset could account for a reluctance to change their funding models towards things such as social investment or impact investing, which may be more aligned with the charity’s overall goals.
The Bayes paper states: “Charities often see the link between their financial strategy, sustainability, and impact. However they often don’t consider how they will take their work to scale, or the size of the problem they are trying to solve. Charities are poor at considering their growth cycle and how funding can underpin this to achieve growth.”
A focus on sustainability means linking financial resilience to predictable income streams. Empowering trustees to explore different business models to develop a risk appetite for innovation may help charities to develop a financial strategy that is more in line with the outcomes they are seeking to achieve.
While trustees may sometimes be financially risk-averse, finance directors are often, understandably, focused predominantly on finance as a day-to-day procedural activity, and can be significantly less likely to think about impact than other senior managers or trustees.
Developing a culture where finance directors and the finance team recognise that charity funding also underpins impact is crucial. This means removing the disconnect between the board of trustees and the finance department.
Therefore, bringing together senior decision-makers from across the charity, including financial ones, to revisit a charity’s purpose and the critical factors that contribute to what being a successful charity looks like is vital in aligning finance with overall strategy.
Involve the finance director and their team in discussions exploring the charity’s:
Finance directors can then start to ask questions reviewing the financial strategy, with this wider, bigger picture context in mind. Where does your income come from? Can you diversify income streams? Should you consider funding opportunities that both provide a return and help meet your mission? What are your major costs?
And what about reserves? What is your reserves position? Are you too conservative in terms of levels of reserves or are you still seeking to replenish them following the pandemic? Could reserves be used more creatively to meet your mission? It’s important to note that regularly reviewing reserves and assessing them in terms of both a contingency for unexpected events and use towards a charity’s overall strategy is a part of alignment to core purpose and sustainability.
What horizon planning can you do to assess how revenue and expenditure might be affected in the short-, medium-, and long-term? How can you plan a long-term strategy for the organisation if it isn’t built upon robust budgeting?
To enable trustees to have confidence in expanding their risk appetite to new funding models, they will require the right management accounting information from the finance department – clear, accessible, accurate, timely – on a regular basis. Establishing, developing and fulfilling a charity’s strategy relies on constant monitoring and analysis of the financial metrics underpinning it.
For a charity to be successful – and have an impact – it needs a clear strategy. It also needs well-managed finances and procedures. But having income in itself is not enough – finance needs to be clearly aligned with that strategy.
Developing a culture to enable this in an organisation will help ensure both effectiveness, and the sustainability required to enable it. Transparency and communication across the whole charity, as with so many areas, is key.
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