Carolyn Sims, director of banking at Charity Bank, offers six steps to an exemplary financial plan for those looking to grow and ensure sustainability.

As you look over your financial plans, are you convinced they will help your organisation withstand extra costs or unforeseen challenges? Do they stand up to rigorous stress-testing?

Having seen diverse business plans for organisations across sectors there are six areas, which stand out for me when it comes to financial planning. These are the junctures at which organisations will either succeed or fail in the face of challenges.

Realistic financial projections

In the social sector, our passion, hopes and ambitions can cloud our judgement. Particularly with new, untried initiatives or those involving a big increase in activity, organisations can be over-optimistic, often making unreasonable assumptions. An unreasonable assumption is a cash-flow problem waiting to happen.

The best financial planners will always give priority to pragmatism over passion.  They will assess their projections dispassionately, erring on the side of caution when considering expected income, expenditure and forecasting increases in activity. Any expectations for an increase in income will have a solid basis.

To fine-tune their projections, some people like to prepare best, difficult and worst-case scenarios to test how vulnerable their organisation might be under different circumstances. They’ll come up with a note of possible actions which would help resolve the challenges of tricky and worst-case scenarios.

A board with the skills to navigate a changing funding climate

Boards of trustees usually include people who are highly qualified in the specific activities undertaken by the organisation but sometimes lack someone with financial expertise.

A skills audit is a useful way to make sure the board is capable of steering an organisation down the best course. Organisations that are willing to identify skills gaps and recruit additional trustees as appropriate often find they are able to pivot and improve their plans for sustainability.

Some organisations opt to train their boards in financial planning. There are pro-bono offers of professional support from organisations like The Cranfield Trust, which provides assistance for managing finances and utilising loans and social investment.

Access to additional funds for growth

Organisations expanding their activities, or embarking on new projects often need access to additional cash to support day-to-day operations. Considering this at the beginning of a new project is key to success. Good plans give careful attention to what level of resources will be needed to fund normal activities as well as the new projects and are tailored accordingly. Some organisations will create access to additional funds through an overdraft or by taking out a loan to provide working capital. Another option is to set aside savings, which can be spent accordingly.

Emergency funds for unexpected project costs

Some business plans do a stellar job of identifying probable project costs, but forget that projects don’t always go to plan whether in terms of costs or time to complete. As a result they under-estimate the levels of emergency funding they need to cover unexpected events.

Putting aside emergency funds is essential to managing the risks involved in a project. Organisations with robust plans will have identified the risks involved, for example increases in costs of materials, unexpected ground conditions, the effect of bad weather or delay in the receipt of a grant, and hold an appropriate level of reserves to be used in case of emergency.

Making a habit of identifying risks

The desire to take quick advantage of an opportunity that will help the growth of an organisation and enable it to increase social impact can mean there isn’t time to plan, test and gauge potential risks. Should risk assessment ever be skipped?

People have different views on risk-taking and growth, and scarce time and resources can make it tempting to take short-cuts, but time spent planning is seldom wasted. In my experience, planning and identifying possible risks involved in a project helps the most resilient organisations to come up with mitigating actions which reduce those risks and steer them away from obstacles.

Identifying risks and actions that can be taken to avoid them also enables organisations to base their assumptions about future income and costs on facts and good research, a vital ingredient of a fool proof financial plan.

Fine-tuning & stress-testing

Perhaps the best method for testing a business plan to make sure it remains viable and robust in adverse circumstances is to question the detail. If you can provide strong answers to difficult questions you know your plans are robust; if you can’t it’s a good pointer towards what you need to focus on to improve:

• Can I show why the organisation’s plans are viable?
• How detailed is my knowledge of how the plans will be implemented – are there any gaps?
• What are the hidden barriers to implementation?
• How will we overcome those barriers?
• Do we have the skills as an organisation needed to deliver and overcome challenges?
• Is the organisation’s team learning continuously about best practice and drawing on the experience of others?
• Are the assumptions we have made soundly based on evidence and on past experience (whether our own or those of others)?
• Have we stress tested our plans against unexpected events and do we have actions for best, difficult and worst-case scenarios? Here are a few scenarios to consider:

Affordable homes for young and vulnerable people:

• In the case of a building set to be let as affordable housing, what happens if occupancy is only 90 per cent, rather than 95 per cent?
• How might you respond to the possible loss of housing benefit to those that are unemployed between 18 and 21? How would a decrease in income affect residents? Will your business plans sustain such cuts?

Using loan finance:

• If loan finance is a part of funding what happens if interest rates rise by 2 per cent?

Developing or refurbishing a building:

• Are there adequate finances available for a project, which is delayed by six months or one which incurs costs 10 per cent higher than budgeted?

Carolyn Sims is head of banking at Charity Bank, which has approved over £200m worth of loans to small and large charities and social enterprises over the last decade.

Call Charity Bank’s loans team on 01732 441919 or visit www.charitybank.org/charity-loans for more information, to discuss the suitability of loan finance for your organisation or to apply for a loan.

With thanks to Charity Bank for their support with this article. 

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