prs acevo strategic financial management (apr 07) final

8/8/2019 Prs ACEVO Strategic Financial Management (Apr 07) Final

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Strategic Financial Management

ByMark E Freeman



Co ntents

St ra t egic financial managemen t

Breaking i t down

Tools

Failure

S ummary



Strategic Financial Management

Definiti o n: ³the applicati o n o f financial techniques t o strategic decisi o ns in o rder

t o help achieve the decisi o n-maker's

obj ectives´

Strategy : a carefully devised plan of ac t ion t oachieve a goal, or t he ar t of developing orcarrying ou t such a plan

Fin a nc e : t he business or ar t of managing t hemone t ary resources of an organisa t ion

M a n ageme n t : t he organising and con t rollingof t he affairs of an organisa t ion or a par t icularsec t or of an organisa t ion



Strategy

Purpose : How will yourorganisa t ion achieve i t s desiredfinancial posi t ion?

To achieve t his, you mus t ask :

WHAT ± fu t ure posi t ion doyou aim t o reach?

WHERE ± are you now?

HO W - are you going t o ge t t here?

According t o Professor Michael Por t er of Harvard Business S chool,Fund ame n tal to the s ucc ess of a n y c ompa n y a nd to a n y effortto d evelop strategy i s hav in g a proper goal for b u s in ess c learlyin m ind.



Finance

Wha t fu t ure financial posi t ionshould t he chari t y reach?

How does i t in t end t o ge t t here?

How does t he chari t y in t end t omanage t he compe t ing demandsof spend versus re t ain?

Do t he chari t y¶s t rus t ee andmanagemen t unders t and t heprimary s t a t emen t s?



Management

Alt hough linked wi t h accoun t ing, t he focus of s t ra t egic financialmanagemen t is differen t. As David Allen no t es in his book St ra t egicFinancial Decisions : A Guide t o t he Evalua t ion and Moni t oring of BusinessSt ra t egy . St ra t egic financial managemen t combines t he backward-looking, repor t -focused discipline of (financial) accoun t ing wi t h t he moredynamic, forward-looking subjec t of financial managemen t. The keyelemen t s of each, combine t o provide t he essence of s t ra t egic financialmanagemen t , and are : A cc o un t in g Fin a nci al

Passive Impar t ial

St andardisedM a n ageme n t Report in g Co n trol

Proac t ive Involved Cus t omised



Management Co nt¶d

B a ckw ar d loo kin g Verifiable

RealisedTangible

F or w ar d loo kin g Judgmen t al Po t en t ial In t angible

I nw ar d loo kin gObjec t ive

Cos t s Capi t al main t enance

O u t w ar d loo kin gS ubjec t ive

ValuesAdequa t e re t urn



Management Co nt¶d

Stat ic

Discre t eS hor t - t erm

Profi t s/Asse t s

D y n am ic

Con t inuum Long- t erm Cash flow



B reaking the Strategy D ow n

1 . Immedia t e needs

2 . S hor t Term requiremen t s

3 . Medium/ Long TermRequiremen t s



I mmediate Needs

Cash

Pressures on t he chari t y : Income Flows;

Expendi t ure; and Capi t al/ one off expendi t ure

Resources i t can u t ilise (brand,

position, e

tc)

Curren t posi t ion ± ensure t his iscorrec t before moving on



Sh o rt Term Requirements

6 - 1 2 mon t h plan

Ac t ion poin t s t o t urn t hese in t o financials t ra t egy

Realism

Cash and accrual budge t s for nex t ,andfollowing 5 years

S ys t ems in place t o suppor t t he s t ra t egy

Alignmen t of s t ra t egy wi t h corpora t e plan



Medium / L o ng Term Requirements

Income s t reams ± new/ differen t ?

Expendi t ure ± inves t men t in t o

fu t ure income s t reams . Addresst he imbalance of revenues andexpendi t ure

Finance ± wha t t ype is mos t sui t able?

Repor t ing and managing t hes t ra t egy

Exper t ise



T oo ls o f The Trade

KPI s

Fin a nci alStateme n ts

CashF lo w s

F ore c asts

P roje c tB ud gets

M¶ me n tReports

B ud gets

B u s in ess/c orporate

pla n

T OOL S



B usiness Plan

D ef ini t i o n: ³ M i ss i o n or c orporate pla n as to w hat thec har i ty i s go in g to d o a nd by w he n´

N ormally includes :

Overview of the chari

tyMarke t place

Assessmen t of marke t and services Why and wha t makes i t unique and wha t it is going t o do

Execu t ive managemen t

Fundraising and marke t ing

S WOT Curren t financial posi t ion and

Finance requiremen t s



B udgeting & Re-f o recasting

Decide on t he bes t me t hod fort he chari t y t o use for t he nex t fewyears :

Zero based budge t ing;Ac t ual wi t h his t orical;

Projec t budge t ing; and Combina t ions of t hese .

Rela t e t he annual budge t s back t ot he original business plan andassess any variances and t heirimpac t on t he overall plan .

Re-forecas t ing, decide a t beforet he budge t process t het imeframes for t his t o occur :

Mon t hly; Quar t erly

S emi-Annually



Co st Co ntr o l & Assessment

U nders t and t he major cos t s of t he chari t y including salaries and process of increases, recrui t men t and rela t ed s t aff cos t s;

Look t o simplifying t he expendi t ure s t reams - Reduce numbers of suppliers, cycles of paymen t s;

For one-off expendi t ure unders t anding how t o bes t ring fence t hem andhow t hey will be cu t a t t he end of t he projec t ;

Projec t budge t ing for areas of new expendi t ure;

U nders t and where you are making an inves t men t and how t his is going t obe funded; and

U nders t and long t erm commi t men t s .



C ash Fl ow Management

N eeds t o be de t ailed no t summary;

N eeds t o t ake accoun t of cyclical fac t ors;

N eeds t o be unders t ood by managemen t - especially t heimplica t ions of i t ;N eeds t o be conserva t ive; and

S hould no t t ake accoun t of posi t ive i t ems t ha t will improve t hebo tt om line when t here are a number of unknowns .



Saving f o r a

rainy day?

Reserves p o licies



The C urrent State o f Affairs

Chari t ies curren t ly hold £2 6 billion in reserves or equivalen t t o t he annualincome of t he sec t or .

The reserves policy should align wi t h your overall s t ra t egy o t herwise howwill you know wha t reserves you require?

70% of chari t ies wi t h income grea t er t han £ 1 0,000 do no t have a reservespolicy!

Chari t y Commission found t ha t £5 . 5 billion is being held by chari t ies infinancial reserves wi t hou t being accoun t ed for by a reserves policy!

Media cri t icism ± due t o no t unders t anding why reserves are held in t hefirs t place or t he ra t ional behind holding reserves



W hat are Reserves?

³ The resources t he chari t y has or can make available t o spend forany or all of t he chari t y¶s purposes once i t has me t it scommi t men t s and covered all i t s o t her planned expendi t ure´ ( S OR P 2000)

Reserves should exclude :

Permanen t Endowmen t

Expendable Endowmen t

Res t ric t ed Funds

Designa t ed Funds

Income funds t ha t could only be realised by disposing of fixedasse t s held for chari t y use .

A ll w e are in tereste d in i s the Ge n eral Reserves!!!



Reas o ns f o r H o lding Reserves

To fund working capi t al

To fund unexpec t ed expendi t ure e . g . U nplanned even t s

In t he even t of large varia t ions in income

To fund fu t ure income genera t ion

To fund fu t ure chari t able expendi t ure

The live line in t he even t t ha t every t hing goes t he wrong way!

T he ma in reaso n i s the w orr i es abo u t inc ome var i at i o n !



Summary o f Reas o ns

Reaso n for Reserves Expla n at i o n

Clos u re t o enable t he chari t y t o mee t it s obliga t ions (e . g . paying i t scredi t ors) in t he even t of winding up t he chari t y

P r ud e nc e t o provide a minimum level of cover as bes t prac t ice or a rule

of t humbB ud gete d c ha n ge t o provide cover beyond t he minimum level t o cope wi t h

expec t ed changes in ac t ivi t y levels and/or t iming differences

Un expla in e d var i ab i l i ty

t o provide an addi t ional level of cover which a tt emp t s t o coverunexplained (or unforeseeable) variabili t y in income and/orexpendi t ure s t reams

Spe ci al proje c ts t o provide addi t ional finance which enables t he chari t y t o fundspecial projec t s on an ad hoc basis

Cap i tal f undin g t o provide sufficien t finance t o suppor t t he chari t y's longert erm programmes (in ex t remis, a chari t y wi t h sufficien t capi t alreserves such t ha t on an ac t uarial basis i t can suppor t it sobjec t s in perpe t ui t y would be fully endowed)

Cu rtsey of Z/Ye n L i m i te d



Devel o ping a Reserves P o licy

Par t of s t ra t egic plan

Budge t ing and decision making process

Focuses fundraising ac t ivi t ies

Communica t ion t o ex t ernal par t ies

Bes t Prac t ice/ S OR P



W hat sh o uld it c o ver?

The reasons why t he chari t y needs reserves

The level/ range of reserves t ha t t he Trus t ees believe t he chari t y needs

Wha t s t eps t he chari t y is going t o t ake t o es t ablish/ main t ain t he level

Arrangemen t s for moni t oring / reviewing t he levels of reserves .

I t ¶s abo u t w hy a nd art icu lat in g i t!



Risk B ased Appr o ach

Analyse exis t ing funds

Review fu t ure income s t reams/ assess reliabili t y and significance

Review commi tt ed expendi t ure and t he con t rollabili t y of i t ; is i t fixed orvariable?

Assessmen t of t he risks t he chari t y faces ± looking a t t he po t en t ialcommi t men t s and con t ingencies and assess t he likelihood of t hesema t erialising .



Risk B ased Appr o ach Co nt¶d

A n alys in g ex i st in g f und s

Review t he balance shee t t o ensure t ha t all endowmen t and res t ric t edfunds have been iden t ified

Ensure t ha t all designa t ed funds can be jus t ified and t here are no fur t herones

Iden t ify asse t s t ha t canno t be readily conver t ed in t o cash




A n alys in g Fu t u re I nc ome Streams

Review exis t ing funds ± likelihood of con t inua t ion

Risk wi t h exis t ing funding ± number of sources

A risk profile of fu t ure income s t reams can be buil t using t hefollowing informa t ion :

Type of income/ S ource of fundingCurren t levelPropor t ion of t o t al income as %

Do you expect

levelto increase or decrease?How many o t her funders can help?

How cer t ain is t he source of funding in t he fu t ure?




A n alys in g c omm i tte d expe ndi t u reWha t are t he expendi t ure pa tt erns and t o wha t ex t en t can t he chari t ycur t ail or change t he t iming of cash ou t flows? Reserves may be requiredt o fund expendi t ure in advance of income receip t s . Assess :

Type of expendi t ure

Curren t level of expendi t ure

Propor t ion of t o t al expendi t ure

How far does t his expendi t ure go t owards reaching t he chari t y¶sobjec t ives?

N umber of people affec t ed by a cu t in t his t ype of expendi t ure

Iden t ify t he source of funding



The Essentials Steps

Review of exis t ing funds

Analyse income s t reams

Analyse expendi t ure and cash flow

Analyse t he need for reserves

Calcula t e t he reserves level

Formula t e reserves policy

Presen t a t ion of reserves policy

O t her Approaches t o De t ermining ReservesSt a t us Quo ± Wha t we need t o keep going

Cease t o be ± cos t s t o wind chari t y up

Ac t uarial Liabili t y



Reserves

Don¶ t confuse size wi t h liquidi t y;

N eeds t o be aligned wi t h income and expendi t ure pa tt erns;

N eeds t o be a t a level t ha t can be jus t ified and presen t ed inline wi t h t he s t ra t egy;

Take in t o accoun t commi t men t s t ha t are no t on t he bookswhen calcula t ing op t imal levels;

U nders t and t he spli t be t ween res t ric t ed and unres t ric t edfunds; and

Who else needs t o unders t and t he reserves and how t heyare s t ruc t ured .



Rep o rting T oo ls o f the Trade

Business plan or corpora t e plan

Budge t s

Managemen t repor t sFinancial s t a t emen t s

Cash flows

Projec t budge t s

Forecas t s

Key performance indica t ors



Presentati o n o f Results

U se Key Performance Indica t ors t o moni t or and gauge success and failure;

Targe t s

Aligned wi t h mission/goals

S imple and precise repor t ing;

Focus on wha t has happened and how t o change or u t ilise t he resul t s;

Communica t e changes needed t o achieve original plan; and

Iden t ify risks and ways t hese can be addressed .



W hat d o y o u need t o present?

Top level informa t ion

Income levelsMain expenses

Cash flowS urpluses or defici t sTarge t s for t his and coming years

Corpora t e plan informa t ion



Funding levels

Is your income

S hor t t erm Long t erm

Fixed t ermOu t come dependen t ?Dependen t on repor t s t o funders?



K ey c o sts

Wha t are t he main cos t s?How do you analyse t hem?

What trends are

there in

these cos

ts?Are cos t s linked t o income?

Do you measure t his rela t ionship?



Rec o mmendati o ns

Produce depar t men t al summaries

Rota

te a review of each area

Look a t t he Balance S hee t t wice a year

Review your cash flow a t leas t once a quar t er



Rec o mmendati o ns

Produce a one-page summary of t he keyinforma t ion t o carry in a walle t

Become involved in t he crea t ion of budge t s« . and moni t or t hem via forecas t s

Make t he numbers t ell a s t ory«



Reas o ns F o r Failures

N o mission/corpora t e s t a t emen t ±agreed in t erms of iden t ifiabledeliverablesN o unders t anding t he curren t posi t ion and wha t is reallyachievable from i t

Time t able t o shor t t o developplansU nder inves t men t in fu t ureresources or requiremen t s t oachieve t he plan

Repor t ing t o complex and no t unders t ood easyFailure t o unders t and wha t isrequired t o achieve t he plan bymanagemen t and t rus t ees



Simple is B est

U nders t and in de t ail t he componen t s of yourchari t y¶s cash cycle and how t hey affec t yourlonger- t erm capi t al requiremen t s

Do no t confuse profi t (surplus/defici t ) wi t h cashflow .

Turnover is vani t y,

Profi t (surplus) is sani t y,

Cash flow is reali t y .

1 + 1 = 2



Copyrigh t 2007 Chari t y Business .U ni t 1 , Euroway, Blagrove, S windon, W ilt s S N 5 8Y N

Tel : 0 1 793 554200

Fax : 0 1 793 554239

Email : mark . freeman@chari t ybusiness . com

Visi t our websi t e a t : www . chari t ybusiness . com

prs acevo strategic financial management (apr 07) final

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