As those with March year-ends start thinking about year-end and those with a December year-end are well underway with audit preparation, it is important to be thinking about the future and not just the past. Your auditors tell you that you need to demonstrate going concern in your governance and financial reporting and your stakeholders are interested in your messaging to them regarding the challenges, opportunities and finances.
You have had plenty of opportunity to hone your reserves policy and going concern statements in your financial statements during the pandemic, but right now things feel more challenging and uncertain than ever. It is becoming less of what we say and more of what we do to make sure we remain resilient and can respond to risk and adversity.
There is no one-size-fits-all approach – some of you are complex groups, and so perhaps there are challenges with only part of the group; some of you have plenty of assets but no cash; some just do not have the crystal ball to predict what is likely to happen.
So, the auditor wants:
- Cash flow forecasts going forward at least 12 months from the date of signing of the financial statements;
- Some sensitivity analysis to show what the best and worst case scenarios might be; and
- Evidence.
The first two sound easy – you’ve done them for years – you just need to tweak the past to reflect the budget and the future. The evidence is the hard part. What if it is a little tight in some months and what if some of the main safety blankets might not be assured for the whole year?
Two tones
The answer is levers – finding enough to show that regardless of what happens, your future survival is within your power and ability. As an auditor you often find that a conversation with the CEO is loaded with great optimism, ideas and initiatives and you come away with confidence. The attention moves to the finance director (FD) and the picture is much different, with sleepless nights; worry about the bank, cash flow and more. This puts the board in a difficult position with such variability of tone between the CEO and FD. As an FD you want to be cautious and professional but as a CEO you want your strategy to be upbeat, positive, and confident.
There is no problem with these two tones, but to get over the line we need to come back to these levers – these things that can be done if there are variations to plan A or plan B. The types of things that come to mind are:
1. Assessment of headroom.
Every cash flow forecast has a monthly forecast cash balance. This is the start of the journey – it shows how tight things are with the budgeted, pessimistic or optimistic results. It highlights seasonality and one-offs and their timing. With plenty of cash comes very little concern, whereas heading into the red will add to the sleepless nights. Think about the timing of costs, the flexibility of significant one-offs, the reasons for the cyclical cash flow timings and then think of how to address them with discussions with budget holders, suppliers and funders.
2. Consideration of other sources of finance.
Many charities have other assets and facilities that are relevant for financial resilience. This could be investments, property, overdraft facilities or connected charities. Whereas the intention would be to not use these, there are some interesting initiatives that can help to release cash when needed. Discussions with investment, property and banking advisers can help to demonstrate to them your particular needs and how best to achieve them.
3. Application for funding.
Many funders (particularly those who know you) will be flexible on the timing of the release of funding and the related reporting cycle. By looking to have funding released in advance rather than in arrears, many of the cash flow challenges can be relaxed. Care needs to be taken when the projects are restricted. However, balancing the timing of income and costs will reduce the peaks and troughs of your cash flows.
Auditors and trustees alike look to see robust challenge to the financial forecasts together with mitigating strategies to address issues such as those that are mentioned in this article. By having all the tools thought through, discussed with the relevant external parties and plans put into place well in advance, the managing of charity finances in times of difficulty can become much more routine and result in many less sleepless nights.
Adam Halsey is partner and head of charities at haysmacintyre
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