In tough financial times, there’s no room for the traditional levels of complacency in budget setting, warns Alistair Gibbons.

Our financial fortunes at Citizens Advice could have been much worse over the last couple of years. Our core government grant has flatlined during a period when many charities, including our own bureaux, have suffered worse.

However, looked at over the last ten years, our core income has been cut in real terms by almost 50 per cent.

Any charity suffering such a hit on a key income source needs to react by looking closely at its financials. But more than that, it needs to use its business-planning and budget-setting processes to take a good hard look under the bonnet.

Risk of complacency

There is not much change among the largest organisations in the charitable sector. A civilsociety.co.uk report last year highlighted that none of the 50 largest charities in 1985 disappeared from existence over the subsequent 25 years. By comparison, 28 of the top-50 FTSE 100 companies had either been acquired or broken up over the same period.

There are many reasons behind this, not least of which is the profit motive. But why should the pursuit of profit and shareholder-return lead to more aggressive behaviour than the pursuit of improved lives for a charity’s beneficiaries?

As well as being largely immune from profit-driven aggression, many parts of the sector have, until recently, also appeared to be largely cushioned from economic conditions, relative to the private sector at least.

After the crash of 2008, the private sector reacted quickest. Public sector organisations moved to restructure soon after. But only now – three years later – does the effect of the recession seem to be hitting most charities.

A static sector, initially cushioned from the most immediate effects of the economic downturn, means that some charities may have become complacent. But tight financial times put the spotlight on the business models of every charity.

With flat income, it becomes painfully clear that at Citizens Advice we are not immune from inflation, and it will be hard to finance any pay increases for staff. While we do expect additional income, this is for additional services we are required to provide, and therefore unlikely to help with the simple maths of making ends meet.

So, as we prepare the budget for another year, we need to look at expenditure with fresh eyes, once more.

Our clients’ needs, and how they want to access advice, is constantly changing. We need to change as fast, if not faster. For this budget process, we are forcing budget-holders to make hard choices about which areas of their work they think have the greatest impact on the corporate business plan.

Zero-based

Focusing on change and committing to priority-based budgeting is the easy bit, and it is only phase one. We are already focusing on phase two, which will be a fundamental review of our strategic plan.

2013/14 is the final year of our current strategic plan, so we need to start work now to put a challenging strategy in place for the year after. We are going to adopt a zero-based planning approach. This will be an activity driven by the whole business, not just finance. It will be time to get out that blank sheet of paper.

It can be very threatening to all concerned when a robust review of budgets is undertaken. Getting people supportive is critically important. For this reason, the first thing to be written on that blank sheet of paper will be ‘client needs’; we will work backwards from there. This is what unites stakeholders in every charity, so it is a good place to start. My impression is that charities are out of practice at taking this sort of approach to budgeting and planning. Whether going through good times or bad, charities need to ensure that they are meeting the changing needs of their beneficiaries as efficiently and effectively as possible.

In fact, this mantra could frame any trustee board agenda. It is not a bad reminder. As most service-users are likely to be in a worse position than we are in these difficult economic times, it is the least they would expect from us.

Alistair Gibbons is head of finance at Citizens Advice