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Strategic Financial Management
ByMark E Freeman
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Co ntents
St ra t egic financial managemen t
Breaking i t down
Tools
Failure
S ummary
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Strategic Financial Management
Definiti o n: ³the applicati o n o f financial techniques t o strategic decisi o ns in o rder
t o help achieve the decisi o n-maker's
obj ectives´
Strategy : a carefully devised plan of ac t ion t oachieve a goal, or t he ar t of developing orcarrying ou t such a plan
Fin a nc e : t he business or ar t of managing t hemone t ary resources of an organisa t ion
M a n ageme n t : t he organising and con t rollingof t he affairs of an organisa t ion or a par t icularsec t or of an organisa t ion
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Strategy
Purpose : How will yourorganisa t ion achieve i t s desiredfinancial posi t ion?
To achieve t his, you mus t ask :
WHAT ± fu t ure posi t ion doyou aim t o reach?
WHERE ± are you now?
HO W - are you going t o ge t t here?
According t o Professor Michael Por t er of Harvard Business S chool,Fund ame n tal to the s ucc ess of a n y c ompa n y a nd to a n y effortto d evelop strategy i s hav in g a proper goal for b u s in ess c learlyin m ind.
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Finance
Wha t fu t ure financial posi t ionshould t he chari t y reach?
How does i t in t end t o ge t t here?
How does t he chari t y in t end t omanage t he compe t ing demandsof spend versus re t ain?
Do t he chari t y¶s t rus t ee andmanagemen t unders t and t heprimary s t a t emen t s?
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Management
Alt hough linked wi t h accoun t ing, t he focus of s t ra t egic financialmanagemen t is differen t. As David Allen no t es in his book St ra t egicFinancial Decisions : A Guide t o t he Evalua t ion and Moni t oring of BusinessSt ra t egy . St ra t egic financial managemen t combines t he backward-looking, repor t -focused discipline of (financial) accoun t ing wi t h t he moredynamic, forward-looking subjec t of financial managemen t. The keyelemen t s of each, combine t o provide t he essence of s t ra t egic financialmanagemen t , and are : A cc o un t in g Fin a nci al
Passive Impar t ial
St andardisedM a n ageme n t Report in g Co n trol
Proac t ive Involved Cus t omised
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Management Co nt¶d
B a ckw ar d loo kin g Verifiable
RealisedTangible
F or w ar d loo kin g Judgmen t al Po t en t ial In t angible
I nw ar d loo kin gObjec t ive
Cos t s Capi t al main t enance
O u t w ar d loo kin gS ubjec t ive
ValuesAdequa t e re t urn
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Management Co nt¶d
Stat ic
Discre t eS hor t - t erm
Profi t s/Asse t s
D y n am ic
Con t inuum Long- t erm Cash flow
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B reaking the Strategy D ow n
1 . Immedia t e needs
2 . S hor t Term requiremen t s
3 . Medium/ Long TermRequiremen t s
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I mmediate Needs
Cash
Pressures on t he chari t y : Income Flows;
Expendi t ure; and Capi t al/ one off expendi t ure
Resources i t can u t ilise (brand,
position, e
tc)
Curren t posi t ion ± ensure t his iscorrec t before moving on
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Sh o rt Term Requirements
6 - 1 2 mon t h plan
Ac t ion poin t s t o t urn t hese in t o financials t ra t egy
Realism
Cash and accrual budge t s for nex t ,andfollowing 5 years
S ys t ems in place t o suppor t t he s t ra t egy
Alignmen t of s t ra t egy wi t h corpora t e plan
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Medium / L o ng Term Requirements
Income s t reams ± new/ differen t ?
Expendi t ure ± inves t men t in t o
fu t ure income s t reams . Addresst he imbalance of revenues andexpendi t ure
Finance ± wha t t ype is mos t sui t able?
Repor t ing and managing t hes t ra t egy
Exper t ise
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T oo ls o f The Trade
KPI s
Fin a nci alStateme n ts
CashF lo w s
F ore c asts
P roje c tB ud gets
M¶ me n tReports
B ud gets
B u s in ess/c orporate
pla n
T OOL S
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B usiness Plan
D ef ini t i o n: ³ M i ss i o n or c orporate pla n as to w hat thec har i ty i s go in g to d o a nd by w he n´
N ormally includes :
Overview of the chari
tyMarke t place
Assessmen t of marke t and services Why and wha t makes i t unique and wha t it is going t o do
Execu t ive managemen t
Fundraising and marke t ing
S WOT Curren t financial posi t ion and
Finance requiremen t s
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B udgeting & Re-f o recasting
Decide on t he bes t me t hod fort he chari t y t o use for t he nex t fewyears :
Zero based budge t ing;Ac t ual wi t h his t orical;
Projec t budge t ing; and Combina t ions of t hese .
Rela t e t he annual budge t s back t ot he original business plan andassess any variances and t heirimpac t on t he overall plan .
Re-forecas t ing, decide a t beforet he budge t process t het imeframes for t his t o occur :
Mon t hly; Quar t erly
S emi-Annually
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Co st Co ntr o l & Assessment
U nders t and t he major cos t s of t he chari t y including salaries and process of increases, recrui t men t and rela t ed s t aff cos t s;
Look t o simplifying t he expendi t ure s t reams - Reduce numbers of suppliers, cycles of paymen t s;
For one-off expendi t ure unders t anding how t o bes t ring fence t hem andhow t hey will be cu t a t t he end of t he projec t ;
Projec t budge t ing for areas of new expendi t ure;
U nders t and where you are making an inves t men t and how t his is going t obe funded; and
U nders t and long t erm commi t men t s .
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C ash Fl ow Management
N eeds t o be de t ailed no t summary;
N eeds t o t ake accoun t of cyclical fac t ors;
N eeds t o be unders t ood by managemen t - especially t heimplica t ions of i t ;N eeds t o be conserva t ive; and
S hould no t t ake accoun t of posi t ive i t ems t ha t will improve t hebo tt om line when t here are a number of unknowns .
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Saving f o r a
rainy day?
Reserves p o licies
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The C urrent State o f Affairs
Chari t ies curren t ly hold £2 6 billion in reserves or equivalen t t o t he annualincome of t he sec t or .
The reserves policy should align wi t h your overall s t ra t egy o t herwise howwill you know wha t reserves you require?
70% of chari t ies wi t h income grea t er t han £ 1 0,000 do no t have a reservespolicy!
Chari t y Commission found t ha t £5 . 5 billion is being held by chari t ies infinancial reserves wi t hou t being accoun t ed for by a reserves policy!
Media cri t icism ± due t o no t unders t anding why reserves are held in t hefirs t place or t he ra t ional behind holding reserves
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W hat are Reserves?
³ The resources t he chari t y has or can make available t o spend forany or all of t he chari t y¶s purposes once i t has me t it scommi t men t s and covered all i t s o t her planned expendi t ure´ ( S OR P 2000)
Reserves should exclude :
Permanen t Endowmen t
Expendable Endowmen t
Res t ric t ed Funds
Designa t ed Funds
Income funds t ha t could only be realised by disposing of fixedasse t s held for chari t y use .
A ll w e are in tereste d in i s the Ge n eral Reserves!!!
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Reas o ns f o r H o lding Reserves
To fund working capi t al
To fund unexpec t ed expendi t ure e . g . U nplanned even t s
In t he even t of large varia t ions in income
To fund fu t ure income genera t ion
To fund fu t ure chari t able expendi t ure
The live line in t he even t t ha t every t hing goes t he wrong way!
T he ma in reaso n i s the w orr i es abo u t inc ome var i at i o n !
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Summary o f Reas o ns
Reaso n for Reserves Expla n at i o n
Clos u re t o enable t he chari t y t o mee t it s obliga t ions (e . g . paying i t scredi t ors) in t he even t of winding up t he chari t y
P r ud e nc e t o provide a minimum level of cover as bes t prac t ice or a rule
of t humbB ud gete d c ha n ge t o provide cover beyond t he minimum level t o cope wi t h
expec t ed changes in ac t ivi t y levels and/or t iming differences
Un expla in e d var i ab i l i ty
t o provide an addi t ional level of cover which a tt emp t s t o coverunexplained (or unforeseeable) variabili t y in income and/orexpendi t ure s t reams
Spe ci al proje c ts t o provide addi t ional finance which enables t he chari t y t o fundspecial projec t s on an ad hoc basis
Cap i tal f undin g t o provide sufficien t finance t o suppor t t he chari t y's longert erm programmes (in ex t remis, a chari t y wi t h sufficien t capi t alreserves such t ha t on an ac t uarial basis i t can suppor t it sobjec t s in perpe t ui t y would be fully endowed)
Cu rtsey of Z/Ye n L i m i te d
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Devel o ping a Reserves P o licy
Par t of s t ra t egic plan
Budge t ing and decision making process
Focuses fundraising ac t ivi t ies
Communica t ion t o ex t ernal par t ies
Bes t Prac t ice/ S OR P
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W hat sh o uld it c o ver?
The reasons why t he chari t y needs reserves
The level/ range of reserves t ha t t he Trus t ees believe t he chari t y needs
Wha t s t eps t he chari t y is going t o t ake t o es t ablish/ main t ain t he level
Arrangemen t s for moni t oring / reviewing t he levels of reserves .
I t ¶s abo u t w hy a nd art icu lat in g i t!
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Risk B ased Appr o ach
Analyse exis t ing funds
Review fu t ure income s t reams/ assess reliabili t y and significance
Review commi tt ed expendi t ure and t he con t rollabili t y of i t ; is i t fixed orvariable?
Assessmen t of t he risks t he chari t y faces ± looking a t t he po t en t ialcommi t men t s and con t ingencies and assess t he likelihood of t hesema t erialising .
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Risk B ased Appr o ach Co nt¶d
A n alys in g ex i st in g f und s
Review t he balance shee t t o ensure t ha t all endowmen t and res t ric t edfunds have been iden t ified
Ensure t ha t all designa t ed funds can be jus t ified and t here are no fur t herones
Iden t ify asse t s t ha t canno t be readily conver t ed in t o cash
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Risk B ased Appr o ach Co nt¶d
A n alys in g Fu t u re I nc ome Streams
Review exis t ing funds ± likelihood of con t inua t ion
Risk wi t h exis t ing funding ± number of sources
A risk profile of fu t ure income s t reams can be buil t using t hefollowing informa t ion :
Type of income/ S ource of fundingCurren t levelPropor t ion of t o t al income as %
Do you expect
levelto increase or decrease?How many o t her funders can help?
How cer t ain is t he source of funding in t he fu t ure?
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Risk B ased Appr o ach Co nt¶d
A n alys in g c omm i tte d expe ndi t u reWha t are t he expendi t ure pa tt erns and t o wha t ex t en t can t he chari t ycur t ail or change t he t iming of cash ou t flows? Reserves may be requiredt o fund expendi t ure in advance of income receip t s . Assess :
Type of expendi t ure
Curren t level of expendi t ure
Propor t ion of t o t al expendi t ure
How far does t his expendi t ure go t owards reaching t he chari t y¶sobjec t ives?
N umber of people affec t ed by a cu t in t his t ype of expendi t ure
Iden t ify t he source of funding
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The Essentials Steps
Review of exis t ing funds
Analyse income s t reams
Analyse expendi t ure and cash flow
Analyse t he need for reserves
Calcula t e t he reserves level
Formula t e reserves policy
Presen t a t ion of reserves policy
O t her Approaches t o De t ermining ReservesSt a t us Quo ± Wha t we need t o keep going
Cease t o be ± cos t s t o wind chari t y up
Ac t uarial Liabili t y
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Reserves
Don¶ t confuse size wi t h liquidi t y;
N eeds t o be aligned wi t h income and expendi t ure pa tt erns;
N eeds t o be a t a level t ha t can be jus t ified and presen t ed inline wi t h t he s t ra t egy;
Take in t o accoun t commi t men t s t ha t are no t on t he bookswhen calcula t ing op t imal levels;
U nders t and t he spli t be t ween res t ric t ed and unres t ric t edfunds; and
Who else needs t o unders t and t he reserves and how t heyare s t ruc t ured .
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Rep o rting T oo ls o f the Trade
Business plan or corpora t e plan
Budge t s
Managemen t repor t sFinancial s t a t emen t s
Cash flows
Projec t budge t s
Forecas t s
Key performance indica t ors
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Presentati o n o f Results
U se Key Performance Indica t ors t o moni t or and gauge success and failure;
Targe t s
Aligned wi t h mission/goals
S imple and precise repor t ing;
Focus on wha t has happened and how t o change or u t ilise t he resul t s;
Communica t e changes needed t o achieve original plan; and
Iden t ify risks and ways t hese can be addressed .
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W hat d o y o u need t o present?
Top level informa t ion
Income levelsMain expenses
Cash flowS urpluses or defici t sTarge t s for t his and coming years
Corpora t e plan informa t ion
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Funding levels
Is your income
S hor t t erm Long t erm
Fixed t ermOu t come dependen t ?Dependen t on repor t s t o funders?
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K ey c o sts
Wha t are t he main cos t s?How do you analyse t hem?
What trends are
there in
these cos
ts?Are cos t s linked t o income?
Do you measure t his rela t ionship?
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Rec o mmendati o ns
Produce depar t men t al summaries
Rota
te a review of each area
Look a t t he Balance S hee t t wice a year
Review your cash flow a t leas t once a quar t er
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Rec o mmendati o ns
Produce a one-page summary of t he keyinforma t ion t o carry in a walle t
Become involved in t he crea t ion of budge t s« . and moni t or t hem via forecas t s
Make t he numbers t ell a s t ory«
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Reas o ns F o r Failures
N o mission/corpora t e s t a t emen t ±agreed in t erms of iden t ifiabledeliverablesN o unders t anding t he curren t posi t ion and wha t is reallyachievable from i t
Time t able t o shor t t o developplansU nder inves t men t in fu t ureresources or requiremen t s t oachieve t he plan
Repor t ing t o complex and no t unders t ood easyFailure t o unders t and wha t isrequired t o achieve t he plan bymanagemen t and t rus t ees
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Simple is B est
U nders t and in de t ail t he componen t s of yourchari t y¶s cash cycle and how t hey affec t yourlonger- t erm capi t al requiremen t s
Do no t confuse profi t (surplus/defici t ) wi t h cashflow .
Turnover is vani t y,
Profi t (surplus) is sani t y,
Cash flow is reali t y .
1 + 1 = 2
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Email : mark . freeman@chari t ybusiness . com
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