Some Simple Rules...
Some people are paid monthly and organise their own finances to pay the big bills – credit card and mortgage just after the salary cheque comes in. Some self employed people are paid irregularly when jobs are completed and have to organise their budgets to ensure that they can meet their regular bills in the months in which they may receive no income.
Likewise a community and voluntary body must be aware of its cash flow – the regularity or otherwise of its income and expenditure and that the two may not match. There may also be a mismatch between the certainty of its expenditure on payroll for example and the uncertainty of its income, both in any financial year and over several years. It is very, very important to
understand the pattern of your cash flow if you are to avoid nasty surprises.
Forecasts and Accounts
Firstly, having simple forecasts and accounts and monitoring what happens each month is the best way of getting that understanding. Read our article on budgeting
which deals with setting up your forecasts: your accounts simply slot in the actual figures each month.
Looking at the numbers, can you do anything to match the pattern of receipts and expenditure? Can you use contract staff for work for which you have time limited grants? If you make substantial payments to clients, can you review the timing of your payments to match when you get cash, without causing them undue hardship.
Time your payments
Thirdly, you may need to closely manage your payments at certain times of the year – defer purchasing less urgent items for example until the money comes in.
Alternative funding sources
Fourthly, are there other funding sources you might look to for resources? The funding section
of The Wheel website will be a useful source in this case. While many funding schemes run efficiently and effectively, for some there are a lot of delay and uncertainty as to how they will be run and delays in respect of payments. It is important to develop a strategy for dealing as
effectively as possible with these situations – identifying the real decision makers and factors which they take into account in making decisions, and the real timing of their disbursements. This kind of Key Account Management can be particularly time consuming, using up resources that might otherwise go into delivering services, but it is critical to success. It may be helpful to
seek to open up a dialogue with the donors that will make them aware of their own costs of slow and unclear decision-making, for example of having staff allocated to an area but not making decisions for much of the year.
Open a dialogue
Fifthly, most community and voluntary organisations are now careful not to apply for grants where the overhead costs in terms of preparation of the proposal and periodic and final reporting exceed the value of the grant, and/or the delays in cash flow of staged payments is not fundable from other resources. If the funding is for an activity where your organisation is active,
have you considered trying to open a dialogue with the donors? For example, linking up with other organisations to send a paper to the donor showing what the costs are and asking if the size of grant could be substantially increased and/or the administrative/financial arrangements standardised/simplified? Donors have to be sure that money is accounted for properly and keeping good, basic accounts of the kind set out here which are open for inspection as required should make it possible to reduce and make more effective the administrative overhead incurred by donors also.
If you can tighten up on your debtors and manage your creditors better, you may be able to release some extra cash in the organisation....
Manage your debtors
Sixthly, can you manage your debtors (money due to you / receivable by you) and creditors (money that is due to others from you) more tightly? There are a number of key issues which are very important and even more so in difficult times are – how quickly are you collecting money due to you and when are you paying for your supplies and other accounts as they fall due?
Unlike a business which has trading income which is generally received according to an accepted pattern – cash/credit card sales in a shop for example, or say 45 days credit for some business to business transactions, it can be difficult for a community and voluntary organisation to get its debtors paid promptly, but it is essential that you do the best you can to get in amounts due as quickly as possible, and in particular, not to allow the total amount to increase and become ever more long standing.
A table that you may find helpful to set up will show this to you very clearly – it is an ‘Aged Debtors’ table. This will be very simple if you have a small number of relatively large payments due to you in a year, and you will easily be able to track when they came in last year, and when they actually come in this year, and to chase up those that are late. If there are very many it is a
bit more complicated, but no less necessary.
You need to know the total amount of debtors (amounts receivable) outstanding and categorise them by the length of time they have been outstanding, into say:
- 1 month
- 2-3 months
- 3-6 months
- More than 6 months
If you are not keeping the totals already, to get the total amount of debtors, you may be able to work from a recent balance sheet which will have a number for the last day of the financial year, and to add and subtract debtors which have come in or been paid since then. Look at when the amounts were due in each case and list them in a table under the period outstanding and total them. Large amounts outstanding the longest should be chased as a priority and you should have a system for chasing overdue amounts so that you get in money quicker. Comparing your aged debtors at the end of every month and with the same period last year, will give you a good idea as to whether you are collecting your funds more effectively. If you do not keep a running total of debtors and there are quite a few of them, now is the time to start. What amounts are due to you now – what grants, fundraising income, membership fees etc? Put them down in a spreadsheet by age category and chase up.
Likewise, what is the situation with your creditors (amounts payable)? Do you have a structured systems for paying bills when they fall due and, if you had a problem with cash flow coming up, would you have a good track record with your suppliers so that if you needed to ask if you could pay a bit later than usual in a particular instance, they would know that you are reliable and
agree to this? It is a serious offence to trade when insolvent and insolvency is defined as being unable to meet your bills when they come due.
If you can tighten up on your debtors and manage your creditors better, you may be able to release some extra cash in the organisation. It will never be like a supermarket which gets paid instantly at the check-outs and pays its suppliers on 45 days or more credit, so that it can invest funds it gains in the timing difference, but it will help all the same.
Not directly a financial point, but one with important financial consequences - make sure that you regularly update and keep a back up of all your records off-site. If ever your computer stops or there is an accident or theft at your premises, you do not want to find that you cannot reconstitute your financial and other key files. Losing your records can have serious financial
consequences and major reputational ones – there are all too frequently cases in the media where community and voluntary – and other bodies – have inadequate records to support their work. Do not let this happen to you.