Michael Walsh says one area many organisations overlook during difficult times is the balance sheet. Here he offers five strategic tips to help you maintain financial sustainability to support your mission.
Not-for-profits often ask about the ’big squeeze’ facing the sector. In today’s environment, they are feeling the squeeze from many angles, with changes to fundraising legislation, reduced government funding, less investment income and rising expenses all having an impact.
In such an environment, it is important to think ahead rather than wait it out.
Obviously, for not-for-profits, managing costs is very important, particularly as they do not have a profit margin to rely upon. However, one area many organisations overlook during this time is the balance sheet. The effective management of this can be transformational for any organisation – including a charity.
For some not-for-profits, this may be a new topic. Nevertheless, I urge every organisation to think about their annual budgets and consider the most effective use of their asset base to support their mission.
To help think ahead and navigate through this process, here are five strategic tips to help you maintain financial sustainability. No longer at the mercy of government funding or decreasing donors, this puts in place strategic long-term thinking that will benefit the organisation for years to come.
1 Match reserves with strategic financial management
Organisations need to classify funds according to their use. Funds held for longer periods should have a different investment strategy to those held over the short term. Not-for-profit committees should consider each basket of funds to determine the appropriate investment strategy, considering the purpose, risk tolerance and timeframe.
For example, committees should consider a long-term investment strategy for long-term funds, bequests or investments in perpetuity. In turn, short-term (purposed) funds should remain as cash or at-call investments.
During this time of analysis, not-for-profits should also consider seeking professional advice, as discussed in tip five below.
2 Vigilance on managing costs
Cost inputs drive the programs and mission of every not-for-profit. As such, they should carefully consider their largest expenses – such as salary increases – when inflation is below 2%. Programs to manage these costs, as well as rules relating to accepting cost increases from key providers, are very important.
3 Understand the impact of compounding
Low returns and weak economic growth is the new ‘normal’ and it will be for several years to come. With this in mind, any change to costs, service provider expenses or budget differences will have a compounding effect.
Any budget that is in deficit now will be significantly more so in three to five years’ time, and this makes it harder to reduce it in the end. If an organisation has no discipline to match budget constraints, it could result with it potentially going backwards.
This is when real long-term thinking comes into effect. The best time to start on budget difficulties is now. Not-for-profits must understand the compounding nature of budgets and investment income, implementing long-term strategies to maintain financial sustainability.
4 Diversify activities to improve funding opportunities
Often the word ‘diversification’ is associated with investments, but it is also very important when it comes to funding. By diversifying your activities and creating opportunities to receive funding from multiple sources, you become independent of the whims of government funding. For example, not-for-profits can apply for philanthropic grants or even capital investment, or create a social enterprise.
This is the very best defence in a tough financial environment. By diversifying income streams, not-for-profits decrease the risk of catastrophe should funding be cut.
When diversifying income streams, not-for-profits should also consider the term of funding. Organisations should target stable, long-term income flows from sources such as grants, fundraising and income generation activities.
5 Develop relationships for professional advice
With funding pressures increasing, the big squeeze can lead an organisation to keep activities in house to save money. This may work great in some areas. However, not-for-profits need to become more comfortable in reaching out for professional advice. This is especially the case when taking strategic steps towards investment or the diversification of income streams.
There is no ‘one size fits all’ approach but utilising intermediaries such as financial advisors, accountants or wealth management units give not-for-profits access to innovative advice.
Not only does this create professional organisational practises, but it also gives not-for-profits the opportunity to think about their business in a way they might not have previously considered.
Michael is CEO of UCA Funds Management. He is the former Risk Manager, Head of Responsible Investment Research and Interim CEO of Hunter Hall International. He has over 40 years of combined business, academic and financial services experience and has more than 15 years’ experience in the responsible investment sector as a consultant, publisher, director and senior executive. He is a Non-executive Director of Smallco Investment Manager.
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