Reserves policy and their link to strategy, resilience and income risk

Jan 07, 2020

In this article, the first of a three-part series, we take a look at one of the biggest issues in managing the finances of a charity - committing to and planning its strategy and how this then feeds into budgets, income risk and profile.

Hospices tend to have an income risk profile which is inherently risky – the vast majority of their income comes from fundraised income, donations and legacies.

By their nature, these income streams are not necessarily predictable or reliable. Therefore the role of the finance team is managing that income risk to allow the hospice to plan and manage its strategy and invest in resources, be they buildings, staff or assets/equipment, to deliver the services required.

The delivery of the strategy will require the hospice to commit to expenditure which will not necessarily be able to be cancelled immediately – such as operating leases on buildings and worst case scenario, redundancies. 

Therefore, even though income may not be certain, the budget has to have assumptions around income levels to allow for an element of planned costs and service delivery.

So how do you cope with such a challenge and explain it to the board of trustees so that they are comfortable and understand the business risk?

The first aspect of this is breaking your income into their various sources to determine the level of risk and likelihood of income that could be achieved for each source.

One mistake that boards and management teams can easily make is to take the budget as the income of the hospice and not consider the risk that it will not be received. So where income receipts are falling below that expected and planned, the hospice has to think about a reforecast to recognise anticipated lower income levels being achieved.

Does such a reforecast warrant consideration on decisions for cost cutting exercises to be undertaken or delay expenditure on projects? Or perhaps in such situations, is there a recognition of the amount that can be utilised from the reserves of the charity to defer the decision to the future? 

Therefore, budgeting and managing finances for a hospice requires an understanding of the strategy and how this feeds into the budget and most importantly the assumptions made therein – with regards to income, income risk, the reserves level and therefore the sustainability and resilience of the organisation.

We have written other articles which look at these areas in more detail:

  • Understanding Income risk
  • How the use of reserves and a reserves policy can help hospices
Without a very clear link between income streams, their risks, future strategy and reserves, all of which feed into the bigger picture of strategic management, it will be difficult for charities to actively manage their resilience and sustainability.

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