6 considerations for planning NGO finances during a crisis

The impact of the Covid-19 pandemic has been far reaching across the not-for-profit sector, with international charities hit especially hard.

The impact on fundraising for most charities is significant at a time when many programmes need to be delayed due to lockdown measures, leading to a substantial disruption to activities.

At the same time, there is the potential that many of the poorest in society will be hit hard by the virus if it spreads to the vulnerable communities.

As an auditor and advisor, and as a trustee of two charities, Steve Harper at Haysmacintyre has spent a significant part of his time over recent weeks considering budgets, forecasts and financial models. This is especially tough at a fast-moving time when the landscape continues to shift significantly and rapidly.

Below Steve has laid out six things to consider when planning NGO finances during a crisis such as Covid-19.

Focus on cash flow

In times of difficulty, it is particularly important for charities to focus on cash flow. This is especially the case for those organisations who are funded in arrears or who have limited liquid reserves. Key to effective cash flow forecasting is a detailed assessment of when income will be received, and payments are due to be made.

When making this assessment it is important for a charity to understand its various contractual commitments. It is also important to ensure that the cash flow model considers the risks of delayed receipts of contracted income, or reductions to income where donors are no longer able to support.

The government has implemented measures designed to support businesses through the current economic crisis, including the Job Retention Scheme for furloughed workers, and the deferral of VAT payments. In both cases, it is important that the cash flow effects of these schemes are carefully modelled. Considering the timing differences between the salary payments and the likely receipt of the grant is important when assessing the organisation’s cash flow.

Plan for different scenarios

Where there are uncertainties, it is important to consider a range of different scenarios. There are several approaches to this, including plans driven by the length of time a lockdown situation is imposed in the UK (and other countries of operation). Other charities have based their scenario planning on income projections, with a focus on what the charity can continue to do with progressively worsening income scenarios.

In each scenario, it is important to consider what the key decision points are. This includes understanding key contractual commitments, including lease costs and funding renewals.

For some charities, there will inevitably be conversations about closure and the ability of the charity do so in an orderly fashion and in a way that does not expose its beneficiaries to harm. Where this is a potential outcome it is important that the trustees are aware of the potential costs of closure and what they consider the point at which such a decision needs to be taken under each model.

Consider the issue with restricted income

In difficult times, there is always an impulse reaction to cut costs. However this presents a challenge for many international charities. A significant proportion of funding received by international charities is restricted, which means that it must be spent on particular activities which have been specified by the donor.

Simply cutting costs can often lead to a proportionate reduction in income or in the charity holding restricted fund balances which cannot be used. For this reason, it is important that funding agreements are well-understood. Relationships with donors are also important, and in some cases, donors may be able to agree to vary the activities or timelines of a contract to reflect current circumstances.

Assumptions and planning

Separate to the consideration of different scenarios is the need to consider the sensitivity of different assumptions. In any financial model, there will be a number of assumptions, some of which will be more critical to the overall model than others.

In reviewing the budgets and forecasts it is important that the assumptions made are clearly explained to the trustees, and that the reasonableness of those assumptions is carefully considered. The key assumptions may include donor retention rates or the ability of the charity to deliver contracted projects and therefore “earn” the income.

Once the key assumptions have been identified, the charity should assess how sensitive those assumptions are. For example, a charity receiving income from regular givers will often assume an attrition rate each month. Haysmacintyre is seeing many charities assume a greater level of donor attrition in the coming months given the economic impact of Covid-19.

Short-term planning vs long-term planning

For some organisations, there is a natural tendency to focus on short-term survival. Whilst a focus on the immediate issues in times of crisis is important, it is also helpful to consider the potential longer-term effects of the current situation.

For many charities, there is a complexity to managing restricted and endowed funds. Fund accounting is key when considering if a charity has sufficient funds to meet its liabilities. Forecasts and management accounts should distinguish between the different funds held by a charity to ensure that management and trustees know what is available to fund the charity’s activities and its liabilities.

Management and trustees should ensure they are aware of how restricted funds can (and cannot) be used. In some circumstances it is possible to vary restrictions, though this requires approval from the Charity Commission or permission from the donor. This is a potentially complex area which may require legal or other professional advice.

Engaging with trustees

It is crucial to consider how best to involve the trustees in the planning process. Given the fast-changing landscape, it may be necessary to hold more frequent meetings as there may be matters which require urgent trustee attention. In some cases, to enable an agile response, it can be helpful for detailed discussions to take place at the Finance Committee level or for a working group to be convened to scrutinise the figures in detail.

Where the approach is to delegate to a sub-group, you must ensure that this is in line with the charity’s articles of association, or governing document, and that consideration is given to how the sub-group will report back to the full board of trustees.

Whilst a smaller group facilitates quick decision making, the trustees continue to have collective responsibility. Having formally documented terms of reference can be a helpful way of ensuring that the sub-group stays on track and that mission-drift is avoided.

Find out more about Haysmacintyre and what they’re doing during this crisis for NGOs.