Charity Finance Directors Group

Transcription

1 Charity Finance Directors Group Northern Conference Palace Hotel Manchester 24 June 2009 Cash flow management Mark Hilton Director of Finance & Resources Museums Sheffield

2 Cash is king! The importance of cash cannot be overestimated in the current climate. Customers and funders are holding on to cash, suppliers are desperate to get it in on time, banks are being ever more cautious. Cash is always important for any organisation and so the management of it should be too! Quantitive Easing may help the major companies, but Charities traditionally lag the main economy by several months. The pressure on Charities has not reached its peak and it will probably get worse.

3 Cash is king! The importance of cash cannot be overestimated in the current climate. Customers and funders are holding on to cash, suppliers are desperate to get it in on time, banks are being ever more cautious. Cash is always important for any organisation and so the management of it should be too! Quantitive Easing may help the major companies, but Charities traditionally lag the main economy by several months. The pressure on Charities has not reached its peak and it will probably get worse.

4 Cash is king! The importance of cash cannot be overestimated in the current climate. Customers and funders are holding on to cash, suppliers are desperate to get it in on time, banks are being ever more cautious. Cash is always important for any organisation and so the management of it should be too! Quantitive Easing may help the major companies, but Charities traditionally lag the main economy by several months. The pressure on Charities has not reached its peak and it will probably get worse.

5 Forecasts can you get it right? If you have any hope of maximising your cashflow you have to ensure that other aspects of the [charity] are sorted first! Research shows that only 1 in 5 organisations can remain within 5% of their cash flow forecasts The dynamics of cash flow forecasting are different from income & expenditure forecasting The periodic review of cash flow forecasting needs to mirror the natural rhythm of your organisation.

6 Overview The Basics What is cash? Cash the ins and outs Cash flow forecasting the principles Cash flow management How to avoid cashflow problems Cashflow forecasting key business tool Specific Cashflow issues charities Ways to improve cashflow Ways to protect cashflow

7 A choice This session can go one of two ways: If audience are new to cashflows then equal time on each elements outlined above, or If audience are comfortable with the principles of cashflow more time given over to discussion of techniques to improve cash flow management. Question: how many in the audience produce cashflows already and just want to consider examples of improvements to management of cash?

8 What is cash? Cash balances include: coins and notes current accounts and short-term deposits unused bank overdrafts and short-term loans foreign currency and deposits that can be quickly converted to your currency It does not include: long-term deposits long-term borrowing money owed by customers stock charities also have the issue of restricted funds

9 Cash and restricted funds Restricted funds are just that Usually only available to meet expenditure they are set aside for Ordinarily should not be included within the main cashflows of the organisation There is a huge risk of using restricted funds to settle general creditors Designated funds can be available for settlement of general creditors but ensure this is agreed by Trustees.

10 Cash the ins and outs Cash inflows Grants and voluntary income restricted and unrestricted Contract income Payment for goods or services from your customers, usually via a trading subsidiary. Receipt of a bank loan. Interest on savings and investments. Increased bank overdrafts or loans.

11 Cash the ins and outs Cash outflows Payments of grants or benefits Purchase of stock, raw materials or tools. Wages, rents and daily operating expenses. Purchase of fixed assets - PCs, machinery, office furniture, etc. Loan repayments. Income tax, corporation tax, VAT and other taxes. Reduced overdraft facilities.

12 The principles of cashflow forecasting It enables you to predict peaks and troughs in your cash balance. It helps you to plan borrowing It tells you how much surplus cash you're likely to have at a given time. Many banks require forecasts before considering a loan. It requires regular, if not daily, review!

13 Elements of a cashflow forecast It should identify the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns listing forecast and actual amounts respectively. The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations a daily cashflow forecast might be helpful. It is best to pick periods during which most of your fixed costs - such as salaries - go out.

14 Elements of a cashflow forecast The forecast usually lists: receipts payments excess of receipts over payments - with negative figures shown in brackets opening bank balance closing bank balance

15 Elements of a cashflow forecast It is important to base initial forecasts on realistic estimates If you are an established charity, an acceptable method is to combine income for the same period 12 months earlier adjusted for known changes (new grant source etc). Forecast figures must relate to sums that are due to be collected and paid out, not invoices actually sent and received. The forecast is a live entity. It will need adjusting in line with long-term changes to actual performance or market trends.

16 An example At Museums Sheffield, there are four levels of cash flow forecasting: 1. The five year forward plan cash forecast aims to identify whether expansion is possible or contraction needs to be planned update annually but not in monthly detail. 2. The annual cashflow forecast budget to reassure Trustees and auditors on the going concern of the organisation updated annually in full detail. 3. Three month forecast in management accounts to reassure Board on current position and to monitor performance updated monthly. 4. Rolling twelve month forecast - updated daily used to identify peaks and troughs in cashflow and to time supplier payments to maximise cash / minimise costs.

17 Museums Sheffield Management Accounts Forecast cash flow April 2009 Month May Jun July Recei pts Management fee ,515 Grants 100, ,000 - General income 10,000 11,500 12,000 Sales ledger receipts 60,000 50,000 40,000 Cash in transit from branches 5,000 5,000 5, , , ,515 Payments Purchase ledger 300, , ,000 Petty Cash purchases 1,000 1,000 1,000 Wages & Salaries 225, , ,000 Cash book purchases 65,000 65,000 65, , , ,000 Net cash inflow (416,000) (105,500) 161,515 Cash brought forward 411,250 (17,066) (5,066) Cash at branches b/ fwd (12,316) 12,000 15,000 Cash carried forward (17,066) (5,066) 9,934 Represented by Current & instant account (17,566) (5,566) 9,434 Corporate Reserve account - - Petty cash (17,066) (5,066) 9,934

18 Refinements to a simple cashflow forecast You could separate cashflow between major contracts and the rest of your activities. This might identify where further negotiations with major contract funders are required over cashflow.

19 Don t over-complicate it, but. As a charity grows, branches may be added, overseas operations created. By all means consolidate individual branch operations, but base it on bank accounts rather than entities. This regular consolidation of cash flow movements, as with other accounting requirements, will require adequate staffing. Show restricted fund movements in a completely separate analysis from operational cash flows.

20 Managing cashflow Effective cashflow management is as critical to business survival as providing services to beneficiaries. In the current climate it is even more so! Here are some top tips.

21 Accounting software Most accountants have used excel spreadsheets for cashflow forecasts There are now many Accounting software products that can help you prepare your cashflow forecast, They allow updates to your projections to account for changes in income & expenditure. Planning for seasonal peaks and troughs is simplified and you can also make 'what if' calculations. Most banks require fully integrated profit and balance sheet forecasts as well as cashflow; there are many accounting software packages on the market that can make this easier. I use Excel as my model dates back many years. However others here today might have other recommendations.

22 Accounting software It will come down to cost benefit analysis your time in setting up an Excel model from scratch, versus the cost of a package and the time spent tinkering to make it fit your charity s cashflows. It could also depend upon your own spreadsheet knowledge Some ideas: Home produced Excel spreadsheets (also lots of examples on the internet available for free but Sage 50 Forecasting WinForecast (c. 1K) Quick Silver

23 Receivables management Reach a clear understanding with major funders over the payment terms of grants and service agreements. Negotiate deposits or staged payments for large contracts. It's in your funders' interests that you don't go out of business trying to meet their demands. Use the Compact to underpin any discussions. If you can t avoid payment in arrears type of grant contracts, try to agree some form of working capital loan / imprest account with the funder. For trading items define a credit policy that clearly sets out your standard payment terms.

24 Receivables management Issue invoices promptly and regularly chase outstanding payments. Use an aged debtor list to keep track of invoices that are overdue and monitor your performance in getting paid. Consider exercising your right to charge penalty interest for late payment. Consider offering discounts for prompt payment. Consider using a third party to buy your invoices in return for a percentage of the total. (debt factoring / invoice discounting / credit insurance).

25 Supplier management Ask for extended credit terms. Giving your suppliers incentives such as large or regular orders may help, (but make sure you have a market for the orders you're placing). Reduce stock levels and consider using just-intime systems.

26 Asset management Consider leasing fixed assets, eg equipment, or buying them on hire purchase. May need to ensure the Charity is able to do this, and check the memorandum and articles of association etc.

27 Taxation VAT is the main issue facing charities as far as taxation is concerned: If you are registered buy major items at the end rather than the start of a VAT period to improve your cashflow (this may help plug a temporary cashflow gap). Review your VAT situation partial recovery calculations may have changed as a result of change in business. Monthly arrangements may fit you cashflow situation better than quarterly. Accruals accounting for VAT may accelerate your recovery VAT.

28 Taxation Review regularly whether you have moved in or out of a threshold for VAT. A new business support service launched by HMRC to help businesses struggling to meet tax, NI or other payments owed. HMRC staff will review your situation and discuss temporary payment arrangements tailored to your business' circumstances. Talk to your business advisers / external auditor or accountant first though! Gift aid may help the charity but only if it can be accessed regularly.

29 Cashflow problems and how to avoid them Poor credit controls - failure to run credit checks on your customers is risky, especially if your debt collection strategy is inefficient. Even major funders can go under! Failure to fulfil your contract - if you don't deliver on time you won't get paid. Implement systems to manage contracts to ensure timely completion. Ineffective marketing - if your sales are stagnating or falling, revisit your marketing plan. Inefficient service provision - make it easy for your people to access your services. Ensure literature and processes are clear and easy to use.

30 Cashflow problems and how to avoid them Poor management accounting - keep an eye on key accounting ratios that will alert you to an impending cashflow crisis or prevent you from taking on projects or orders you can't handle. Inadequate supplier management - your suppliers may be overcharging, or taking too long to deliver. Create a supplier management system Poor control of gross profits or overhead costs.

31 Using your cashflow forecast as a business tool It is dynamic - you will need to change and adjust it frequently depending on business activity, payment patterns and supplier demands. Set up a regular review of the forecast, changing figures in light of your sales, purchases and staff costs. Legislation, interest rates and tax changes will also impact on the forecast. A regular review will enable you to: see when problems are likely to occur and sort them out in advance identify any potential cash shortfalls and take appropriate action ensure you have sufficient cashflow before you take on any major financial commitment Above all it will require communication with your colleagues!

32 Using a cashflow forecast to avoid overtrading Having an accurate cashflow forecast will help ensure that you can achieve steady growth without overtrading. You will know when you have sufficient assets to take on additional work - and, just as importantly, when you need to consolidate. This will enable you to keep staff, clients / customers and suppliers happy. It is important that you incorporate warning signals into your cashflow forecast. For example, if predicted cash levels come close to your overdraft limits, this should sound an alarm and trigger action to bring cash back to an acceptable level. Ideally, you should always have a contingency plan, linked to a reserves policy. This 'rainy day' money can be used to meet shortterm cash shortages.

33 Ways to Improve Your Cash Flow Invoice promptly. Ask for partial payment up front. Give a reward for quick payment. Chase receivables. Pay bills only when they're due. Keep a lid on spending Delay hiring of staff Reduce stocks Don t be wasteful

34 Ways to Protect Your Cash Flow Keep your eyes & ears open to everything your charity does. Review your credit policies and the credit histories of customers and/or clients. Take action to speed up payment. See if payments to suppliers can be extended. Renegotiate contracts.

35 and finally! Managing outflow of cash flow is hard work but something that should be controllable even if difficult decisions need to be made. Keeping the money coming in on a regular, sustained basis is the tricky part. In both you will need the help of the rest of your organisation