David Adams 8 Sep 2017 02:18pm

Learning the hard way

In tough financial times, private sector businesses could do worse than to study the financial strategies used by charities. David Adams uncovers the methods of the masters of stretching a budget

Caption: Lessons for private businesses from the way charities stretch their budgets

While it is true that some business models – and some business people – thrive on uncertainty and risk, for most companies uncertainty is a curse. And UK business leaders may feel they are living in uncertain times, with the economy destabilised by fears over Brexit, a fragile minority government, and a huge range of external political risks affecting finance and economics across the globe.
Many businesses’ financial strategies have become more cautious. Levels of confidence and business investment have fluctuated in recent years, but one clear trend has been for many to hold onto cash, rather than invest in new plant, equipment or staff.

But could businesses learn something from the way charities and other voluntary sector organisations have responded to adversity in recent years? The third sector has endured a difficult decade, with many organisations suffering from the withdrawal of funding for service delivery from central and local government; while others have been adversely affected by some high profile, disastrous governance failures and fundraising scandals. Yet most charities have weathered the storm and many have managed to alter operational and financial strategies in order to remain financially sustainable.

Clearly, we should not generalise. There are many thousands of very different organisations within the charity sector, from tiny community groups to huge national or international operations. Some have a turnover of many millions; others operate on a shoestring. But one thing that unites them all is that they do not seek a profit. Every penny of surplus capital should instead be put towards meeting the overall goals of the organisation.

Alison Hopkinson, finance and IT director for Oxfam GB, says overt efforts are made to ensure all budget owners in her organisation remember they are spending money donated to further the charity’s cause. “Value for money is a key principle in all spend decisions,” she explains.


A drive to minimise costs helps boost the finances of every successful business (even if sometimes it can seem quite well-hidden). But there are characteristics of the charity sector that can help organisations to focus on delivering value for money.

They include trustee-based governance. Andrew O’Brien, head of policy and engagement at the Charity Finance Group (CFG), believes trustees should be able to offer support and guidance equal or beyond that provided to corporates by capable non-executive directors. “That independent scrutiny can lead to a strong dialogue about where charities should be focusing time, effort and resources,” he says – although he acknowledges that the reality doesn’t always match this ideal. “Sometimes with a trustee board a lack of expertise can lead to inertia that hinders decision-making.”

Jonathan Lachmann, principal in the not-for-profit group at accountancy firm HW Fisher, is also a trustee of the Big Issue Foundation. “[Trustees] can focus on taking the organisation forward, which is a luxury that sometimes corporates don’t have, because senior managers are more involved, by necessity, with day to day work,” he says.

Charities have to be much more transparent about how and where they spend money than most privately owned businesses. So some of the drive to demonstrate value comes from funders.

“There is a view in the private sector that they have a stronger discipline around financial management because of the need to attract external investors – but that’s as naught compared to the discipline that many funders impose on charities,” claims O’Brien. “Good funders will want to know the charity inside out.”

The Statements of Recommended Practice (SORP) for charities also now compels charities to be transparent about value and impact. “Trustees and managers have to think tangibly about what they’re doing and then explain that in a formal document that’s publicly available,” says Lachmann. “That makes trustees and management think about how the organisation works and what it can achieve.”


Many charities that have withstood the direct and indirect effects of the financial crisis have been those able to alter their operations. In some cases this has included developing ways of working with digital technologies that might not have been adopted so quickly otherwise. Fiona Condron, an audit partner specialising in charities at BDO, gives the example of a large charity that is currently working with IBM on artificial intelligence-based technology to enable automated handling of multiple enquiries from the public in relation to specific health concerns.

O’Brien suggests that for many charities the first reaction to financial difficulty was to cut costs, to drive greater efficiency in processes like procurement and to sweat assets. But he says there has been a different approach taken within the sector in the past three years. “Those efficiency changes can only take you so far,” he says. “Where the charity sector is trying to lead the way is in mobilising and motivating volunteers and staff, and developing more flexible forms of working and collaboration with other organisations.” Collaboration might be with other charities pursuing similar aims, or with funders. There could be lessons for private sector businesses to apply to the way they work with supply chain partners, clients or investors.

Although some in the private sector would raise an eyebrow at the idea, businesses might also learn from the way charities manage financial risks. Helga Edwards, director of corporate services at the Woodland Trust, worked in the insurance, retail and financial services industries before joining the charity as head of finance in 2000. She and her colleagues use “tramline” budgeting: the budget is on the middle line, with plans for best and worst case scenarios on either side.

“The top tramline would be the one we use if income is better than expected: what additional activity have we got to push the button on to further our cause?” Edwards explains. “And if income is lower than expected, what are we going to slow down?” She takes pride in the extent to which the organisation monitors its finances. Year end is in December and audit takes place in the third week in January. “We can do that because our books are clean – we have full visibility of our financial situation at all times.”

Budget holders all have stated objectives and those whose budgets are unspent are congratulated and the unspent funds reallocated. “We’ve also got very good project forecasting – which can go out to 20 years – over and above our normal forecasting,” Edwards adds.

Brexit is a concern: although the Trust does not receive direct EU funding, it is anticipating increased competition for some of the funding sources from which it does derive income when other charities that do currently rely on EU funding are forced to look elsewhere.

Other challenges are ongoing, such as trying to increase and predict the flow of legacy income. “Legacy is notoriously unpredictable – we know how many people have said they will leave us gifts in their wills, but you don’t know when someone is going to pass away, how big the gift will be, or if it might be challenged,” Edwards explains.

“Every income stream is now more difficult, and the level of income that the organisation will get is harder to predict. So we look at things we are confident that we know and we don’t over-commit to the unknown stuff.”


Nick Brooks, a not-for-profit partner at Kingston Smith and chair of the ICAEW Charity and Voluntary Sector Special Interest Group, believes many charities are better than many SMEs at risk planning, in part because charities are compelled to build up and maintain reserves. Charities must always be alert to the possibility that a source of income could disappear. He thinks many private sector businesses would benefit from a similar approach, linking reserves policy to risks.

Regulation compels charities to maintain reserves at a certain level and to explain their policy on reserves, but they must also explain why they may be holding more or less in reserves than may appear necessary, and when they will spend reserves designated for a specific purpose.

“If we’re sitting on too much money then we’re not doing the right thing by our cause,” says Edwards. The Woodland Trust has succeeded in building up some surpluses in recent years, so is currently running deficit budgets and investing in innovation, including a drive to increase the charity’s presence at regional and local levels across the country; and investment in better data management technology.

Finally, some businesses might also benefit from looking at how some charities harness a strong organisational culture to achieve the greatest possible progress towards the organisation’s goals.

“I think if private sector businesses can look beyond the bottom line and try to come up with a shared goal, that would help them,” says Wyn Jones, now director of finance at adult health and social care charity Making Space, but previously an accountant in the private sector and deputy director of finance for an NHS Trust.

His organisation discovered exactly how important this can be when reductions to its income following the financial crisis meant it had to try to reduce costs by 15%. “One of the reasons we were able to achieve that was the goodwill we have with our employees,” says Jones. “We asked for ideas from the whole organisation. It took about nine months, with multiple meetings and ideas, but we did make those savings. Some of that involved changing terms and conditions of employment, but because we involved people and because they don’t just see their reward as what they get paid, we were able to do that. We identified the risk of a mass exodus of staff, but it didn’t happen. They came with us.”



Linda Cherrington was director of finance at the Motor Neurone Disease Association (MND Association) during an eventful period in the charity’s financial history, from April 2013 until she left to work for another charity in July 2017.

Her predecessor had designed a strategy based on healthy legacy income anticipated from 2013 onwards, with the charity planning deficit budgets to run for two years. But in the event legacy income was much lower than expected and the charity found it necessary to make substantial cost savings, including headcount reductions of more than 12%.

However, in 2014, the Ice Bucket Challenge became a global phenomenon, with countless celebrities and ordinary members of the public challenging each other to be drenched in icy water in return for pledges of money to charities seeking to cure MND and support people suffering from the condition. In the UK, the challenge resulted in donations to the MND Association worth £7.1m. At the same time, coincidentally, the Association’s legacy income also began to take off. At the end of 2013 the charity’s reserves had been £5.7m; by the end of January 2015 they had reached £17.8m.

The charity consulted staff, trustees, Association members, volunteers and the public, before developing a strategy based on the principle of trying to reach more people in need of support. The extra funds have backed new medical research; and support projects including one first piloted in Greater Manchester but now rolled out across England, Wales and Northern Ireland helping people affected by MND to identify and access benefits to which they are entitled.

“I can’t believe how different the Association’s situation is compared to where we were in spring 2014,” says Cherrington. “We now have aspirational areas of spending plans set out separately, that we can bring into the programme early if we have the resources to do so. We have a five-year strategy in place and I think that’s going to serve the charity very well.”