Managing Risk Report 2010 LR v2 - PKF International uk llp managing risk... · 2011-01-12 · charities share their risk assessments with trustees and most are utilising risk for

ouR fINDINGS2010

ThE PKF ChARITIEs RIsK sURvEy FINDINGs 2010 IN AssOCIATION wITh ThE ChARITy FINANCE DIRECTORs’ GROUP

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This survey comes at a key time for the sector. significant cuts to public spending now appear all but inevitable and the wider economic outlook is one of uncertainty for many charities. It is therefore encouraging that the sector is meeting this challenge head on. Over 80% of charities surveyed have a clear, agreed and documented vision and 42% say that the recession has prompted them to think more strategically.

strategy is about the big picture. It can provide a framework for responding to challenges, as well as help identify opportunities. Above all, developing a vision is a practical activity. To quote a respondent to the survey, the purpose of a strategy is “to be more realistic in planning and give greater thought to the real needs of our beneficiaries”. Almost two-thirds of charities surveyed have reviewed and updated their strategic direction in light of the economic crisis. That is good news – but it is surprising that only half of charities have taken account of beneficiary needs and priorities in developing their strategy. ‘Blue sky thinking’

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is meaningless unless meeting the needs of beneficiaries is at its core. The Commission’s recent survey into Public Trust and Confidence confirmed that people have great confidence in charities’ ability to make a difference to the causes they work for. That confidence is well earned – but charities shouldn’t take it for granted.

The Commission also believes charities could collaborate more with one another. The best time to start working together is before a crisis hits. sharing ideas, contacts, expertise, and knowledge enriches the sector. The Commission encourages all trustees to consider how working collaboratively with other charities might further their objectives. we have developed two toolkits on mergers and collaborations to help charities on that journey.

The sector is proving resilient to financial pressures and uncertainty. It is encouraging that 90% of charities have resolved to emerge from the recession stronger than they went into it. Our most recent economic survey of charities, carried out in March this year, supports this finding. It reveals that over two thirds of charities express confidence about the future. As a help in securing that future I commend this survey to you as a combination of valuable insights and practical tips.

ROsIE ChAPMANDIRECTOR OF POLICy ChARITy COMMIssION


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coNteNtS

Introduction 2

emerging issues 3

Summary of key findings 7

methodology 11

findings 13

1. Strategic and corporate planning 13

2. Risk management 23

3. coping with the recession 31

4. public sector contracts 39

5. Risk management progress 45

pkf charities team 50

the charity finance Directors’ Group 52

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welcome to our ninth annual risk survey findings, Managing risk – moving towards the vision. Produced by accountants and business advisers PKF, in association with the Charity Finance Directors’ Group (CFDG), it is designed to help you overcome the obstacles to achieving your charity’s vision.

Following on from a difficult couple of years in the economy and with the prospect of more challenging times to come, charities have been reappraising their vision and the strategies for delivering it. This reappraisal reflects the changes in need for their beneficiaries and the expectations about the funding available to charities and their partners in delivery. This is carried out against a background of uncertainty, particularly for those dependent upon public funding or public policy decisions.

This year we have explored the impact of the approaches taken by charities to planning and the planning assumptions made, the lessons learnt over recent years and the risks that they face within their strategies and how they are dealing with the matters that most concern the sector.

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For those dependent upon public sector contracts we have also explored how these are expected to change, and the likely impact.

As in previous surveys, the report highlights the areas of strength, common difficulties and issues that are emerging and looks forward at how the sector needs to develop. In order to assist charities further in dealing with some of the issues raised, we have included a sample of tips on some of the key areas as submitted by charities, that between them cover the main suggestions made. These have some consistent messages but also set out a range of different views so that you can consider their applicability to your situation. Thank you to all of the charities that offered suggestions.

where appropriate we have included our perspective on the root causes and wider implications of some of the issues and on best practice, which we hope you will find a useful guide for your own organisation. Following on from this report we will hold a series of seminars to consider the issues raised and focus on how to address them.

Once again we would like to thank everyone who took part in the survey, and hope that you find the results informative, illuminating and useful in managing your charity.

ChARLEs COXhEAD OF ChARITIEs TEAM, PKF

CARON BRADshAwChIEF EXECUTIvE, CFDG


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ThE ChALLENGE Is GETTING GREATER, PARTICULARLy FOR ThOsE whO AREAFFECTED By PUBLIC sECTOR POLICy The survey shows that the sector has had a difficult time over the last two years with 77% of charities feeling the impact of the recession, 41% needing to make cost savings and 28% drawing on reserves. A quarter have been unable to fully or substantially achieve their objectives over the past year. whilst plans for more than two thirds of charities assume a modest increase on income or it remaining static, many charities are predicting falls in grant income, contract income, donations and legacies. Threats to income are seen as by far the biggest risk to the sector. The books are being balanced in many cases by fundraising campaigns, further drawing on general reserves and other unsecured funding.

For the many charities receiving public sector income either as grants or through contracts, the prospects are particularly challenging. It is clear that public sector expenditure is to be cut significantly and that even in areas that are protected as priorities, there will be significant pressures on costs as the public sector itself has a pay freeze and other areas such as the Nhs are subject to restructuring. Given that 61% of charities with public sector contracts are unable to recover full costs now, the prospects for the financial position of these charities is not good.

On top of the absolute reduction in income, there will be uncertainty over requirements; many commissioning bodies will be unwilling or unable to say firmly what they will be purchasing. Furthermore, any changes will probably need to be implemented quickly. The responses in this survey indicate that if the changes in funding / activity required are more than 20%, many will struggle to make the adjustment, particularly if there is less than six months’ notice of the changes. It is important that public sector funders allow time for the restructuring of those providing services for them.

For the charities contracting with public services, it is important that they continue to be driven by their own objectives and do not become just servants to their funders.

It is unclear to what extent the Big society concept will provide opportunities for the sector and for existing charities within it. It is expected that the voluntary sector will take on an increased role in a number of areas, and it appears that this is aimed at existing charities as well as bringing more people into service provision. Given the position of public finances, it will be difficult for public sector bodies to forgo any opportunities to improve their cost position. This could mean charities being allowed to take on greater roles where they can demonstrate the benefit, or being permitted more freedom in the way that they deliver services.

emeRGING ISSueS

ThE sECTOR Is sELF REvIEwING AND ADAPTING The sector appears to have recognised the strategic impact of the changes in the wider economy. Most have reviewed or plan to review their strategy to ensure that it is fit for purpose, taking account of the expected availability of funds and beneficiary priorities. Many have adapted their strategy and in 16% of cases there has been significant change. In addition, most of those that did not have strategic plans previously have been prompted to develop them. The tips suggested by charities indicate the importance of determining the absolute priority areas, involving managers and staff in the process and controlling costs.

Given the experience of the last two years, it is surprising that less than half of the charities have sought to carry out any form of scenario planning or sensitivity analysis. Of those who have, few have

explored scenarios of income fluctuations of more than 10%. The experience of the last two years is that asset valuations and income flows can vary much more than this, and for most of the public sector, cuts of only 10% will be seen as better than expected. The uncertainties over investment returns, grant availability, public contracts, donor intentions, government policy and a possible double dip recession indicate that swings of more than 10% could occur and are worth looking into.

Although 41% of charities have reduced their costs and many more intend to do so, benchmarking of costs has only been carried out by 30% of charities, and other forms of benchmarking, such as activities, staffing levels and risks, by fewer still. Benchmarking can be an effective way of identifying how the actions of one charity differ from those of others. Although such differences may arise from many reasons, analysis of them can highlight opportunities for improvement.


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ThE BAsIC GOvERNANCE AND RIsK MANAGEMENT Is IMPROvING

The survey indicates that, for most charities, the involvement of trustees in strategic planning, risk assessment and the monitoring of financial and operational performance is appropriate, thereby allowing them to exercise proper governance. The strategies developed are providing a framework for decision making and the performance results are stimulating action where they show issues. virtually all charities share their risk assessments with trustees and most are utilising risk for the major strategic decisions. This is reflected in more than one third of charities now perceiving risk management to be embedded.

As ever, there is a significant minority of charities that appear to have major gaps in their governance. 15% prepare management accounts less often than quarterly and 21% do not set an annual budget. For nearly 10% of charities, the strategy is not seen as relevant to the work of management or does not exist. 3% do not set any form of performance targets, 15% do not set out plans for how the desired performance level will be achieved, and 17% do not monitor performance against those targets.

ThERE Is sTILL AMBITION AND OPTIMIsM 95% of charities indicated that they intended to continue developing the charity, investing in infrastructure and capability and securing change. such ongoing investment is essential for the future success of the sector. 89% of charities intend to emerge from the recession stronger than they went into it, many seeking to take opportunities to expand and others seeking to improve collaboration with others. some are seeking to make themselves leaner and fitter and others aim to build reserves as a buffer against future threats. Throughout the survey responses and the tips provided, overall there

appears to be a mood of optimism, a desire to be bold that is however tempered with realism. This provides an excellent attitude for dealing with the challenges ahead.

Although a number of charities have had to make significant reductions in the work that they carry out, 23% do not feel that the recession has had a significant bearing upon them and 76% managed to meet, or largely meet, their targets for last year. Even those that receive significant public funding appear to be getting on with the task of preparing to adjust to the new circumstances as they emerge.

COsT CONTROL AND FOCUs ON PRIORITIEs wILL BE NEEDED

Many charities have already secured cost savings and many more recognise that cost savings will be required. For many it is likely that the scale of reduction will go beyond the sort of savings that can be secured through “tightening the belt”. These charities will go into more fundamental consideration of what aspects of their work to reduce significantly or stop, and how their approach to delivery may be changed to deliver the same for less. As so many charities have noted in their responses, it is important that this is done in the context of an overall strategy, and that the right people are involved in developing that strategy so that it focuses on delivering what is most important to the charity.

It was surprising that only just over half of charities cited understanding of beneficiary priorities as a factor in setting their strategy, and that only 29% sought any form of consultation with them. Even allowing for those charities with non-human beneficiaries, these percentages seem low. Particularly if difficult choices are to be made, it is usually beneficial for those affected by them to have the opportunity to put forward their view.

Inevitably the costs of back office services will be those under greatest scrutiny as charities seek to protect front line services and funders press for demonstrable increases in efficiency. It is important that such reviews take full account of the impact of such changes on the ability to deliver proper governance and internal controls, otherwise there is a danger that any savings will be rapidly absorbed in resolving issues that emerge from the change. It appears that the use of shared service agreements and outsourcing are being discussed more widely as ways to improve efficiency, particularly in smaller charities, along with other forms of working together, for example to maximise purchasing power or to provide business continuity cover. At the moment vAT removes much if not all of the incentive, particularly as vAT rates increase; however, this position might improve if the Government implements the EU directive later this year.

sTRONG LEADERshIP COULD MAKE ThE DIFFERENCE Most charities are going to need to make some changes in order to protect themselves and to maximise their ability to take advantage of emerging opportunities. For many there will be difficult choices to make, resulting in disappointed staff and volunteers who need to be motivated, disappointed beneficiaries and other stakeholders who need to understand why the changes have been made, and robust yet constructive discussions with funders and suppliers.

There are many dangers associated with navigating charities through this period of difficulty. These include acting too slowly, taking wrong options, alienating staff, volunteers, trustees or other supporters, falling foul of legal requirements or disrupting service delivery during the changes. There needs to be clear and considered decision making and strong project management backed up by reliable information, excellent communication and good advice.

As one of the charities notes, the most important factor in determining and implementing strategy is “Get a strong chair and excellent staff” as these will be needed.

This view appears to be widely held. Over the last year we have noted an increasing rate of change in executive level staff within charities and the recruitment of more trustees with specialist skills, as charities have looked to strengthen their teams to meet the changing requirements.

yOUR TIPs Charities were keen to provide advice to others in the sector, with a total of more than 1,000 tips provided. we’ve included a selection of your tips at the end of the sections; strategic and corporate planning, risk management and coping with the reccession.

RIChARD wEIGhELL, author of this series of reports, leads PKF’s Business Risk services team. he has been delivering risk-based services to public, private and charity sector bodies for more than twenty years as an auditor and consultant. since the early drafts of sORP 2000 he has been working with a wide range of charities to help them develop and embed their risk management systems, identify risks and deal with specific risk issues. he also acts in a personal capacity as a charity trustee.


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sTRATEGIC AND CORPORATE PLANNING• 81% of charities have a clear, agreed and

documented strategic direction and a further 5% have clarity of strategy although it is not documented. 65% have revised their strategic direction within the last two years. Most plan at least three years ahead and many for at least five years.

• 74% have set out overall financial and operational targets and how they will be achieved, with only 3% not setting any targets. Monitoring of financial performance is well established.

• 25% of charities did not fully or substantially meet most of their targets last year. 6% noted that their performance was significantly below that planned. The subsectors perceiving the biggest shortfall in their achievement are International and housing.

• 66% of charities have based their strategy on their income increasing or remaining static, the others expecting falls or considering it to be too uncertain to predict. Falls in income are anticipated most widely within housing and Culture, sport & Recreation. Uncertainty is most significant for social services.

• 90% of charities plan some development, most using multiple sources of funding.

• Only 41% of charities carry out any form of scenario planning or sensitivity analysis around their plans and only 41% use any form of benchmarking.

• 44% make their strategic direction a public document with a further 34% making it available selectively, for example to funders and beneficiaries.

SummaRy of key fINDINGS

RIsK MANAGEMENT

• 60% of charities actively involve trustees in risk assessment with a further 27% preparing a risk assessment that is then actively considered by trustees before acceptance. These assessments cover the main risk categories in almost all cases.

• 16% of charities that have staff do not share their risk assessments with them and 82% of those with volunteers do not share risk assessments with them.

• 36% of charities share their risk assessments with funders. This is most common for Conservation & Protection 38% and Civil Rights 40%.

• 16% of charities share their risk assessments with beneficiaries. This is most common for housing and social services.

• 46% of charities felt that their risk management was successful in identifying the risks and their scale, with a further 28% getting it broadly right but missing some issues or underestimating the speed or severity of impact. The subsectors most positive about their risk management were Business Professional Association and Conservation & Protection and the least positive was Religion.

• Income related factors are perceived as by far the biggest and most difficult risk to manage.

COPING wITh ThE RECEssION

• 23% of charities feel that the recession has not had a significant bearing on their activities. This view was most common for Civil Rights 38% and health & Medicine 31%.

• 87% of charities have reviewed their strategy in the light of the recession or plan to do so. Of those who did not have a documented strategy at the start of the recession, 68% have been prompted to develop one.

• Of those that feel that the recession has affected them, 88% found their strategy helpful in coping with it. 12% found their strategy unhelpful and needed to revise it.

• 42% of charities feel that the recession has made them think more strategically. 17% feel the opposite and that they are focused on survival or short term goals.

• 50% or more charities receiving grant income and contract income are expecting these sources to fall, many by more than 10%. Less than 20% expect these income sources to rise for them.

• 60% of charities have needed to make financial adjustments during the recession. The most common changes are cost savings 39% and drawing on reserves 28%.

• 91% of charities intend to emerge from the recession different from the way they were when they entered it. 67% are seeking opportunities to expand, 31% are seeking to build reserves, and 27% aim to increase collaboration with other charities.


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PUBLIC sECTOR CONTRACTs

• 62% of charities indicated that they receive income from public sector contracts. For half of these it represents more than 20% of their income.

• 67% of charities have fewer than 10 contracts, and 22% have more than 25 contracts.

• Over the last year more charities have experienced an increase in income from these contracts than a decrease. however, going forward 73% anticipate a decrease in income from these contracts, 38% expecting it to be by more than 10%.

• Only 17% of charities involved in public contracts feel that they know the contracting intentions of those commissioning their services. 26% feel that they have had no steer at all.

• 42% of charities expect to get less than three months notice of changes in the level of contracted activity. 66% of charities felt that they could adjust to a 10% change in that time frame. Only 10% thought that they could adjust to a 20% change within 3 months.

• Only 39% of charities make a full cost recovery on their public sector contracts. 18% are unable to recover even the direct costs of delivery. For health and Medicine charities only 19% achieve full cost recovery.

RIsK MANAGEMENT PROGREss

• The frequency of review of risks and controls has fallen back to 2008 levels with 48% of managers and 25% of trustees now reviewing them at least quarterly. however, many trustees are reviewing their strategy which may include risk considerations.

• The influence of risk management on decision making has remained stable with high levels of usage in all key areas for most charities. Few charities do not use risk management at all to inform major decisions.

• The proportion of charities considering their risk management to be fully embedded and working effectively is at its highest to date at 34%. In 2009 this was 26%.

77% of charities have been impacted by the recession already and more than 95% see threats to their income as one of their three biggest risks


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methoDoloGy

The survey was carried out jointly between PKF and CFDG in June and July 2010. Charities across the UK were questioned to give a broad cross section of views on the key areas reviewed. This year the focus of the survey was on the issues that charities are facing in planning their future and in delivering their vision, the way that they are dealing with those issues and the matters that concern them the most. A special section was included for those receiving public sector funding. we also included a small number of questions to allow tracking of progress made over the last year.

380 responses were received in total, down from the peak of 466 in 2009 but still the second largest since the survey began. By far the largest group of respondents was once again those with finance director responsibilities, at 52%, probably reflecting the dominance of financial issues among the risks, as well as who receives the questionnaire. however, chief executives (22%), trustees (9%) and other senior managers (17%) are still well represented. The charities operate across the UK, with a number also operating internationally.

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Graph 2: Survey respondents by income size compared to 2009

Graph 3: Regions in which respondents operate Graph 1: Survey respondents by subsector, compared to 2009

The survey covered representatives from each of the charity subsectors, ranging between 97 for Education & Training to 10 for Civil Rights. some respondents chose not to disclose their subsector. As in previous years we have made comparisons between the results of subsectors and noted where some appear to be in stronger or weaker positions. where a charity reports more than one subsector (maximum of three) it has been included in the analysis for each of those subsectors and so in some cases the totals may exceed 380.

Except for the very smallest charities, all sizes of charities are well represented in a survey covering annual turnovers of less than £250,000 to more than £100 million. where significant differences emerge in the responses of charities that appear to be affected by size, these have been flagged.

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StRateGIc aND coRpoRate plaNNING

QUEsTION FINDINGs

Does your charity have a clear vision as to what it is seeking to achieve?

• 81% of charities have a clear strategic direction set out in a documented strategy and agreed by trustees. A further 5% have a clear and agreed strategic direction although this is not documented.

• 6% of charities have agreed objectives but felt that the strategy for achieving them is unclear. A further 7% believe that there is a common understanding of objectives albeit that these are not documented.

• Less than 1% of charities felt that their strategic direction was unclear.

has the strategic direction of your charity changed within the last two years?

• 35% of charities have not changed their strategic direction over the last two years.

• The other 65% have changed their strategic direction. 49% have changed it to some extent and 16% significantly.

• Those receiving more than 20% of their income from public bodies are almost twice as likely to have changed their strategic direction as other charities.

1how much impact does your charity’s strategic direction have on the day to day running and activities?

• 72% of charities consider that their strategic direction influences the majority of their activities and decisions.

• For 19% it influences annual planning and budgeting but not other matters during the year.

• For 6% it only influences the work of trustees. This includes small, medium and large charities.

• For 3% the strategic direction has little impact.

To what level of detail does your charity plan?

• All charities indicated that they prepared a plan for the current year. 92% planned in detail for this time horizon.

• Planning for three years ahead is carried out by 95% of charities, but only 20% do so in detail. More than 90% of those planning in detail have public sector contracts but the frequency of planning in detail varies little for charities with income over £250,000.

• Planning for five years ahead is carried out by 62% of charities but only 6% do so in detail.

• Only 21% of charities plan for a greater than 5 year time span. This is more common for larger charities but includes charities of all sizes.


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Does your charity set targets for performance and the way that they will be achieved?

• 74% have overall financial and operational targets and plans for how to achieve them. This ranges between 92% of charities with income over £25 million to only 44% of charities with income under £250,000.

• 7% have set the targets but without plans as to how they might be achieved.

• 12% have only set financial targets, 8% with plans for how they might be achieved and 4% without plans.

• 3% of charities have not set performance targets. These are mainly small charities.

Is progress against your charity objectives and plans monitored and if so how?

• 98% of charities prepare management accounts. Those that do not are mainly social services and also do not set performance targets.

• Trustees review management accounts at 92% of charities. Those where this does not happen include a full range of sizes of charity and most subsectors. At 49% of charities, trustees monitor operational performance.

• Management review management accounts at 87% of charities, not being involved mainly in the small charities where trustees carry out executive functions. At 82% of charities management monitor operational targets on a regular basis.

• At 82% of charities both management and trustees review the management accounts.

• At 10% operational targets are not monitored by managers or trustees. This is mainly in smaller charities but covers most subsectors.

25% of charities have assumed in their strategy that their income will fall and a further 23% that it will not grow

what happens if objectives/targets are not being met?

• 75% of charities usually provide management with explanations with a review of targets and the approach to delivery. A further 20% do this sometimes.

• 72% usually communicate this to staff and consult on underlying factors and the way forward. A further 19% do this sometimes.

• 10% usually revise targets downwards; this is most common in Education & Training charities. A further 47% do so sometimes.

how did your charity perform over the past year?

• 26% of charities fully or substantially met all of their objectives. This was most common for Business Professional Associations 46% and Civil Rights 40% and least common for International 16%.

• 49% fully or substantially met most of their objectives and 14% partly met targets.

• For 6% performance was significantly below that planned. This included 13% of housing and 10% of Culture, sport & Recreation.

• 5% only met financial targets by reducing activity. These are from a range of subsectors and sizes.

• Overall the subsectors where the highest proportion had difficulty achieving most of their targets were International 36% and housing 33%.

how does your charity plan to finance its development including funding change, developing the resources and capability or investing in the infrastructure? (see graphs 4 to 7, pages 19 and 20)

• 90% of charities plan some development. Those that do not are almost all with income below £10 million and span most subsectors.

• Most charities plan to do so using multiple sources of funding. The most common are use of existing income sources 47%, use of general reserves 46%, fundraising campaign 38% and use of designated development reserve 28%.

• The planned use of a fundraising campaign is most prevalent for International 78%, health & Medicine 54%, Conservation & Protection 54% and social services 54%.

• Grants are most relied upon for Culture, sport & Recreation 24% and Conservation & Protection 22%.

• 14% indicated that the source of at least some part of the funds was unclear and 13% were seeking to rely on development grants not yet secured.



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which of the following reflects the income assumptions for the next two years that your strategy is based upon? (see graph 8, page 21)

• 16% of charities based their strategy on the assumption that their income will increase by more than 10% over the next two years including 26% of Conservation & Protection charities and 24% of International charities. A further 27% believe that their income will increase but by a lower amount.

• 23% assumed that their income would be static over the same period.

• 25% assumed that their income would fall, 14% assuming a fall of more than 10%. Falling income is assumed most frequently by charities involved in housing 38%, Culture, sport & Recreation 35% and Grant Making & Relief 34%.

• 9% consider their income too uncertain to predict. This includes 21% of Business Professional Associations and 19% of social services charities. Despite this most of these charities have prepared longer term plans and current performance does not appear to have been affected.

what were the main drivers for selecting your strategic direction?

• 63% of charities identified multiple reasons for the selection of their strategic direction.

• The most common factor was continuance of the long term aims of the strategy, cited by 79% of charities and as the sole reason by 24%.

• The current understanding of beneficiary priorities was cited as a factor by 53% and as the sole reason by 6%. Beneficiaries were a factor most frequently for charities involved in International 78%, social services 70% and health & Medicine 64%.

• what was achievable within the funds was cited as a factor by 37% but was the sole factor for only 3%. Funds were a factor most frequently for International charities 61% and Civil Rights 50%. It was least often a factor for Culture sport & Recreation 30%.

• For 19% the strategy is set out in a charter, statute or similar, although for most of these other factors also come into play.

who was involved in the development of your charity’s strategic direction?

• Trustees are involved in determining strategy for 98% of charities. Management is involved for 94%.

• staff are directly involved in determining strategy in 68% of charities.

• Beneficiaries and volunteers are involved in fewer cases, 27% and 19% respectively.

• Partners and other stakeholders are involved for 27% of charities.

• Funders are only directly involved for 14% of charities including 25% of Culture sport & Recreation and 18% of social services.

Does your strategy/corporate plan include scenario planning or sensitivity analysis?

• 41% of charities carry out scenario planning or sensitivity analysis. This is most frequent within Business Professional Associations 62% and International 61% and least frequent for Civil Rights 20% and Religion 25%.

• Of those carrying out scenario planning, 74% consider fluctuations of income of up to 10%, 15% consider up to 20%, and 11% consider fluctuations over 20%.

Does your charity share its strategic direction with others?

• 44% of charities make their strategic direction available as a public document, thereby available to all who may have an interest. This is most frequent for International charities 65%, health & Medicine 53% and Civil Rights 50% and least frequent for Conservation & Protection 18% and Culture sport and Recreation 28%.

• 43% actively share their strategic direction with their beneficiaries, half of which do not make it a public document.

• 49% actively share their strategic direction with funders. A further 15% allow funders access by making it a public document.

• 22% of charities do not share their strategic direction with others.

Did your charity use benchmarking to compare its position to other similar organisations?

• Only 41% of charities sought to use any form of benchmarking. where benchmarking was used it tended to be in a number of areas.

• The most common areas for benchmarking being used were costs 31%, activities 27%, staffing levels 21% and service delivery 21%. The least common was risks, benchmarked by only 10% of charities.

• The sectors using benchmarking most frequently were Grant Making & Relief 53%, housing 50% and social services 49%. Those using it least frequently were Civil Rights 20%, Religion 25% and International 26%.

only 41% of charities have sought to use any form of scenario planning or sensitivity analysis around the delivery of their corporate plans


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strategic planning is well established within the sector, typically looking at three to five year time horizons and with decreasing detail, as would be expected. Planning includes the setting of performance targets for most medium sized and larger charities, and most charities appear to be using the strategy to direct their efforts and for monitoring their performance. however, there is a significant minority of medium-sized and larger charities that do not appear to be planning and monitoring performance, and in particular financial performance appears to be much more closely monitored than operational performance.

To date the sector seems to have held up reasonably well with almost three quarters fully or substantially achieving their objectives and almost a quarter considering that they have not been affected by the recession to date. This may give a slightly more positive picture than is actually the case, as a high proportion of those not setting or not monitoring performance indicators have considered themselves to be meeting most of their objectives. In practice it must be difficult for them to assess this.

OUR ANALysIs


Almost two thirds of charities have changed their strategic direction within the last two years, particularly where they are carrying out public sector contracts; the changes are possibly driven by funder demands or concerns about funder intentions. whilst this may be the case, few are involving funders directly in determining their strategy – as one of the tips from a charity notes, it is better to set your strategic priorities and then consider how it fits with your potential funders rather than be driven by their requirements.

There is clearly optimism within the sector, with 90% of charities planning some development. This is important for maintaining morale and quality of provision even if overall growth cannot be achieved – to stop developing could prove fatal. For those whose income is squeezed so that they cannot achieve this through their normal income, some are in a position of having general and designated reserves to call upon to help them restructure. Others are more dependent on fundraising campaigns or grants, both of which are likely to be more competitive and a more difficult source of funding to secure.

Graph 7: Funding of development unclearGraph 5: Funding of development – use of fundraising Graph 6: Funding of development – use of grants Graph 4: Funding of development – use of general reserves

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Education & Training

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maNaGING

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yOUR TIPs ON DETERMINING yOUR sTRATEGIC DIRECTION


Attitude:

• Think widely and don’t be afraid to be honest about risk. No organisation can be risk-free.

• Do not underestimate the risks, regularly review and adapt, ensure appropriate controls are in place.

• Be optimistic, without which nothing is achievable - but be prepared to think the unthinkable.

• Try and make it relevant to work - rather than just a job to be done.

• Don’t assume that risk assessment is ever complete. Remember that risk assessment does not equal risk mitigation.

• Recognise it is an integral part of good business practice, not just a reporting requirement.

• Explain clearly to all involved what is risk assessment and why it is important. Foster a culture of open two-way communication so that risks are identified and managed. Give feedback on the actions taken following risk assessment.

Process:

• Keep it simple, but focused. The benefit is the process, not just completing a nice document.

• start off with an overview of main risks and then look at detail.

• Lead from the top and get an external view.

• Focus on big ticket risks and model scenarios around these rather than trying to identify many moderate/low level risks.

• Keep close contact with funders and decision makers. study economic trends and data. Ensure that the balance of available skills in staff and trustees is right for the organisation.

• Pick several scenarios ranging across the full spectrum of (known) possible outcomes (as it isn’t possible to anticipate all). Focus on these and update when any actual information becomes available.

• Look at all operations and activities and rank them in importance. Review existing relationships with other providers and consider opportunities for joint working and increased collaboration.

• Make sure the process is integrated with development of plans to deliver strategy.

Who to involve:

• Engage with as many employees within the business as possible.

• Get a professional in.

• If you use a reputable insurance broker then use their expertise. Also involve your auditors.

• Learn from others who have already gone through this process.

Dealing with identified risks:

• start with what you know and work outwards. Don’t try to identify and fix all risks at the first iteration.

• Plan, Plan and Plan.

• Ensure the business model is flexible enough to change quickly.

• Act sooner rather then later. Make sure trustees understand the real issues and allocate adequate resource to tackle them.

Use of risk:

• Review risk regularly and ask difficult questions.

• Always be vigilant: the worst risks your organisation faces are those it cannot conceive!

Graph 8: Income assumptions in corporate plans by subsector

+10%

Civil Rights

Culture Sport & Recreation


Conservation& Protection

Health & Medicine

Housing


Religion

Social Services

International

Business/Professional Association

Increase10%+

Increase0-10%

Decrease0-10%

Decrease10%+

No change

Too uncertain

-

-

-

-

-

The income assumptions included within the strategies are fairly evenly spread between those who think income will increase, stay the same and reduce, although there are big differences between subsectors. The risks cited in the next section suggest that there is considerable worry about whether these income levels will be achieved. Given this, it is surprising that so few charities have included either sensitivity analysis or benchmarking in their planning process. sensitivity analysis is essential if dealing with uncertain income flows, in order to be clear about what the implications might be and then to use scenario planning to determine at least options for responding. similarly, in an environment where cost reduction is likely and there is increased focus on efficiency, benchmarking can help to identify where savings might be achievable and, equally important, where they are probably not.

It was surprising that the understanding of beneficiary needs and priorities was only flagged as a factor in determining strategy for just over half the charities. Even allowing for those where beneficiaries are not human and cannot be consulted, this seems low and to go against what the sector is about. For Culture sport & Recreation this was particularly low at 43%. Only a slightly higher proportion make their strategic direction available to their beneficiaries either through actively sharing it with them or making it a public document. If difficult decisions are to be taken about services, the more beneficiaries and other stakeholders are aware of the strategic thinking behind it, the better the chances of them understanding the choices.


maNaGING

RISk


RISk maNaGemeNt2QUEsTION FINDINGs

who has input into your charity’s risk assessment process?

• At 34% of charities, the trustees, management and staff are involved in the risk assessment process.

• At 26% only trustees and managers are involved in assessing risk assessment.

• At 27% management prepare the risk assessment for consideration by trustees. This is most frequent for the larger charities applying for 42% of those with income over £10m and 23% of those with lower incomes.

• At 7% management prepare the risk assessment and report to trustees. This is most frequent for charities with income below £1m.

• At 3% of charities the trustees prepare the assessment and 2% do not have a risk assessment process.

how widely does your charity share its corporate risk assessment? (see graph 9, page 26)

• More than 99% of charities share their risk assessments with trustees, 77% in detail and 22% in summary.

• 84% of charities share their risk assessments with staff, 46% in detail and 38% in summary. This is least common in Civil Rights at 70%, health & Medicine 70% and housing 70%.

• 18% of charities with volunteers share their risk assessments with them, 6% in detail and 12% in summary. This is most common for Religious charities at 54%.

• 26% share their risk assessments with funders, 6% in detail and 20% in summary. This includes 40% of Civil Rights charities and 39% of social services charities.

• 20% share their risk assessments with beneficiaries, 3% in detail and 17% in summary. This is most common within housing 25% and social services 21%.

• 2% make their detailed risk assessment a public document and 6% make a summary risk assessment public. This is most common for Civil Rights 30% and housing 17%.

what areas of risk are covered in your charity’s risk assessment?

• Most charities have prepared a risk assessment to include most types of risk.

• The most widely covered are financial 99%, strategic 92%, operational 92%, reputational 89% and continuity 88%.

how successful has your risk management been in identifying risks that have occurred? (see graph 10, page 27)

• 23% of charities felt unable to form a response to this question.

Of those that did:

• 60% of charities reported that their risk management was successful in identifying the main issues and the potential severity and speed of impact. This view was most common for Business Professional Associations 72% and Conservation & Protection 70% and least common for Religion at 48%.

• 16% felt that they got the issues right but underestimated either the speed or severity of impact.

• 21% felt that they got it right in some areas but not others.

• 4% felt that it either did not identify the issues or significantly underestimated them.


maNaGING

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RISk maNaGemeNt

what do you consider to be your three biggest risks to achieving your strategic direction, in order of importance?

• Biggest risk areas relates to income, cited as the number one risk by 76% of charities and cited as one of the biggest risks by more than 95% of charities. This includes the impact of the markets on investment income, contract income, grants availability and income from membership, donations and legacies.

• The next most frequent risk relates to staffing, cited by 27% of respondents and including loss of staff, difficulty in recruiting and skills issues.

• Other frequently reported risk areas include reputation, government policy, achieving quality/standards, level of reserves and internal decision making capability.

which of the risks listed in the question above do you perceive as most difficult to mitigate and why? (see graph 11, page 28)

• 36% of charities raised issues relating to government funding policy as the most difficult to manage. This covers local government, central government and the Nhs.

• A further 25% raised issues surrounding the wider availability of funding without being specific to the public sector. This includes investment income, donations, legacies and unspecified contracts.

• Other areas flagged most frequently related to government policy and legal changes not related directly to funding 14%, reputation matters 7%, difficulties securing/retaining the right calibre of staffing 7% and matters of internal leadership or strategy 4%.

how are you dealing with your three main risks?

• Those concerned about public sector funding were most often seeking alternative funding, reducing the cost base, lobbying for increased funding or drawing up contingency plans.

• Those concerned about the wider economic environment were most often seeking alternative funding streams, investing in fundraising, reviewing investment strategies, reviewing overheads, introducing cost controls or seeking to prioritise spend.

• Those concerned with public sector policy and regulation were most often planning for different scenarios.

• Those concerned about staffing issues were most often increasing consultation with staff, developing staff retention policies, strengthening recruitment processes or contingency planning.

• Those with reputation related risks most often monitor the position, develop crisis plans or increase consultation.

Most charities seem to have got the level of engagement of trustees about right in risk assessment, recognising that for larger organisations trustees are more removed from the detail and can therefore only meaningfully contribute at a strategic level. Equally most charities appear to be considering the full spectrum of risks, although it was surprising that as many as 8% were not considering strategic issues, 11% not considering reputational issues and 12% not considering continuity. however, this may just reflect the risk categorisations used by them.

The extent to which risk assessments are shared varies more widely than expected. It ranges from those charities that keep assessments between trustees and managers, to those brave organisations that make their detailed risk assessments public documents. Neither of these are likely to be good options for many charities.

OUR ANALysIs

+10%

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


Shared with staff

Public document

Shared with beneficiaries

Shared with volunteers

Shared with funders

- -

Graph 9: Sharing of risk assessments by subsector


maNaGING

RISk


RISk maNaGemeNt

Graph 10: Risk management effectivenessMost do share the assessments with staff, or at least to the extent that they are expected to operate within the risk framework. sharing risk assessments with funders and beneficiaries is more problematic, particularly if in detail, as the funder/beneficiary may well be the cause of some of the risks and the risks could cause them concern, leading to difficulty in the relationships. At the same time, transparency can aid understanding and can help to influence their thinking about the charity in a positive way. In our experience increasingly contractual funders are requesting sight of risk assessments as part of the deal, and so this is likely to grow. where risk assessments are shared it just adds to the importance of keeping them up to date and ensuring that for each risk disclosed there is a strategy for dealing with it.

The charities in this survey appear very positive about the role of risk management to date and the extent to which it has flagged issues. If this is typical of the sector as a whole, it suggests that risk assessment is more effective for charities than for many other industries, which were caught out by the scale and speed of change and rapidly found themselves outside the range of scenarios that they had contemplated, even though the risks had been identified. however, it is notable that almost a quarter of charities did not answer this question, which may suggest that many are not sure about how well risk management has worked at this stage.

It was no surprise that the biggest risks are dominated by income and funding, e.g. the impact of the recession on donations, legacies, corporate donations and trading income, reductions in public sector contracts and grants, and low levels of investment returns. In many respects the uncertainty is as much of an issue as the absolute amount of funding available – which has become a little more transparent since the time that the survey forms were completed. Undoubtedly there will be a more competitive environment for securing funding and charities will need to be able to present a strong case.

Although financial issues were cited as a big risk by virtually all charities, it was only seen as the most difficult issue to manage by 61%, although a number of these issues could impact funding or costs, or be more difficult to address, if funding is limited. The impact of uncertainty around government policy should now be starting to reduce, as at the time of the survey it was the very early days of the coalition government and policies were at an early stage of development.

Graph 11: Most difficult risks to manage

Risk Area

Other funding availability

Government funding policy

+10%

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


Predicted risks but not severity

Predicted risks and severity

Predicted risks in some areas

Underestimated or limited impact

-

-

-

-

-


maNaGING

RISk


Attitude:

• Be very honest about your options, evaluate risks and always work in partnership with funders.

• Do not compromise your principles but be flexible in how objectives are met.

• Take action before you are forced to.

• Be bold. Then apply realism.

Process:

• Go back and read the charity’s objects in the governing documents. Think again about the “nice to do” activities and be aware of essential core activities.

• Create a zero-based budget, i.e. consider what sort of organisation would be needed to deliver the charity’s objectives if starting afresh.

• stick to core competencies and focus on the achievement of outcomes and milestones.

• seek advice: collaborate with other similar organisations and learn from others’ experience.

• Ensure the strategic direction will deliver your objectives in a measurable way.

• Benchmark, network, keep an ear to the ground, keep abreast of the new government budget/directives.

• set strategic plans before analysing the priorities of funders. Then adjust the strategy or persuade funders to review their priorities.

• Go back to basics and ask the fundamentals of “why are we here?” and “how will we make a difference?”

• Find the resources to gather the evidence you need and organise it. Find the space to have reflective conversations about what the evidence represents.

Risk and scenario planning:

• Develop the strategic plan and ensure it has a valid risk resistance and an action plan supporting it.

• Build robust risk assessments with regard to investment and fundraising targets.

• Create a strategic plan with staff and trustees and cost it thoroughly.

• Undertake scenario analysis and share with board as well as all staff, to create a sense of urgency.

Who should be involved:

• Involve trustees at all stages and use a professional facilitator if the strategic change is material.

• Get a strong chair and excellent staff.

Communication:

• Be sure to understand the needs of your beneficiaries.

• Consult with everyone prior to setting objectives - what do your customers want?

• set it out clearly and concisely in a document available to all.

• senior buy-in is key to developing a good strategy.

• Do not underestimate the time needed to effectively communicate strategy to staff.

Flexibility:

• Keep focused on your strategy but be open to ideas and/or changes in operational issues that may be necessary to continue in the strategic direction.

• Good stewardship of the charity must be a priority and reviewed continuously.

RISk maNaGemeNt

yOUR TIPs ON PREPARING A RIsK AssEssMENT

66% of charities felt that their risk management was successful in identifying the main issues and the potential severity and speed of impact


maNaGING

RISk


copING wIth the ReceSSIoN 3QUEsTION FINDINGs

has your charity reviewed its strategic options in response to the recession?

• 76% of charities have completed a review of their strategic options or are in the process of doing so.

• 11% plan to carry out such a review.

what was your level of unrestricted reserves compared to your typical spend at 31 December 2008?

• 50% of charities had unrestricted reserves equating to at least 6 months expenditure. For more than half of these the reserves were for more than 1 year’s expenditure. This was most frequent for Grant Making & Relief 78% and Religion 75% and least common for International 29%.

• 29% had reserves equating to less than 3 months’ expenditure.

• 6% have reserves of less than one month’s spend. This was most frequent for Culture sport & Recreation 18%, Conservation & Protection 18% and International 9%.

Did you have a documented strategy/corporate plan before the recession?

• 84% of charities had a documented strategy or corporate plan before the recession.

If you had a documented strategy/corporate plan, did the existence of the strategy/corporate plan assist in getting through the recession? (see graph 12, page 35)

• 43% of charities felt that their strategy or corporate plan enabled them to stay focused on their objectives.

• 22% used scenario planning and felt that it helped them to respond to changing circumstances.

• 23% felt that the recession did not have a significant impact on their activities. This was most common for Civil Rights 38% and health & Medicine 31%.

• 9% either felt that their strategy was unhelpful, or had to devise a new strategy. This included a mix of subsectors but a higher proportion of smaller charities.

has there been any change in focus within the charity as a result of the recession?

• 41% of charities felt that there had been no significant change in their focus.

• 42% feel that as a result of the recession their charity is thinking more strategically. This is broadly consistent between charities with income of more than £250,000 and covers all subsectors.

• 17% are acting less strategically, either focusing on short term survival or on short term goals. This applies for 22% of charities with income of £10 million to £25 million reducing to only 10% for the smallest charities. Only 3% of the largest charities reported acting less strategically.

If you did not have a documented strategy/ corporate plan, have you now been prompted to develop one?

• 68% of charities without a documented strategy at the time the recession began have been prompted to develop one.


maNaGING

RISk


copING wIth the ReceSSIoN

how have you been financing the charity during the recession? (see graph 13, page 36)

• 40% of charities have found income sufficient to fund their activities in all areas without adjusting costs or services. This is most common for Civil Rights 50% and Grant Making & Relief 53% and least common for International 25% and Business Professional Association 31%.

• 39% have implemented cost savings but maintained service levels. This ranges from Culture sport & Recreation 51% and Business Professional Association 50% to Civil Rights 10% and Grant Making & Relief 21%.

• 14% have stopped some activities, compared with 15% in 2009. 21% have reduced or delayed some activities compared with 38% in 2009. The subsectors reducing activity most are International 48% and Culture sport & Recreation 37%.

• 28% have made some drawings on general reserves. Those drawing on general reserves most frequently are International 48% and Religion 39%.

• 74% of those needing to address a funding gap have applied a combination of methods.

have your planning assumptions been revised as a result of the recession? (see graph 14, page 37)

• 55% of charities receiving grant income were assuming this income would fall, 35% by more than 10%. 33% expected it to remain unchanged.

• 50% of charities receiving contract income were assuming this income would fall, 27% by more than 10%. 33% expected it to remain unchanged.

• 42% of charities receiving donations and legacies were assuming this income would fall, 16% by more than 10%. 38% expected it to remain unchanged.

• 33% of charities receiving trading income were assuming this income would fall, 15% by more than 10%. 35% expect it to remain unchanged.

• 25% of charities receiving membership income were assuming this income would fall, 12% by more than 10%. 50% expect it to remain unchanged.

• 59% of charities expect demand for services to grow. A further 32% expect it to remain at current levels.

• Only 19% of charities have assumed that bad debt provisions may need to increase.

which of the following did you have in place? Annual budget / Management accounts and reporting (monthly/quarterly/annually) /Annual cash flow projection

• 87% of charities had an annual budget in place at the start of the recession.

• 74% had an annual cash flow projection.

• 75% prepared monthly management accounts and 49% prepared quarterly management accounts.

• 4% prepared management accounts only annually or not at all. This was predominantly Grant Making & Relief and Culture, sport & Recreation charities, none of which had achieved all of their financial and operational objectives.

what is your aim for your charity moving forward? (see graph 15, page 37)

• 9% of charities aim to return to the pre-recession organisation.

• 21% aim to be smaller, leaner and fitter.

• 67% are seeking to take opportunities to expand. This is most common in Conservation & Protection, Business Professional Association and Culture sport & Recreation.

• 31% aim to build up unrestricted reserves. This is most common in Civil Rights and Conservation & Protection.

• 27% aim to increase collaboration with other charities. This is most often for housing, Civil Rights and social services charities.

• 5% aim to merge with another organisation, mainly involving health & Medicine or social services charities.

40% of charities have found income sufficient to fund their activities in all areas without adjusting costs or services


maNaGING

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The recession and the associated changes in the external environment do appear to have stimulated many charities to review their strategies, whether or not the recession has yet had a significant impact on their income. This is true for all sizes of charity. For most the strategy has been seen as helpful in getting through the recession to date, although for a number of mainly smaller charities a new strategy was found to be needed. For those that did not have a strategy, the recession has stimulated most to develop one. such an extent of strategic review must be healthy.

The survey shows that the recession is affecting income. Although some have been able to continue as they were, many have had to reduce costs or services or to draw on reserves. Levels of reserves were strong for many at the start of the recession, but such reliance will not be sustainable for long.


The subsector most frequently drawing on reserves, International, is also the subsector that had the lowest reserves at the start of the recession, so further reductions in activity must be likely. There is likely to be a big dependency on fundraising.

The prognosis for income levels is not good. Most charities see all the main types of work as being flat or declining, which suggests that cost and service reductions will continue to be necessary. Nothing arising since the survey was completed indicates that these assessments are unduly pessimistic. such adjustments need to be implemented as soon as possible to minimise uncertainty and put the charities in the strongest position possible.

Graph 13: Charity financing during recessionGraph 12: Perceived benefits of corporate plan

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


Costsavings

Incomesufficient

Use of reserves

Activity stopped or

delayed

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


Scenario planning helped

Plan helped stay focused

Plan did not help

Recession has had no impact

-

OUR ANALysIs

yOUR TIPs ON COPING wITh ThE RECEssION

maNaGING

RISk

maNaGING RISk - movING towaRDS the vISIoN: fINDINGS // paGe 38maNaGING RISk - movING towaRDS the vISIoN: fINDINGS // paGe 37

Funding:

• There is money out there but it takes hard work to find it.

• have to work harder to raise the same amount of money in total from more people. Big ticket events are not attractive. Costs rise!

• Donor base of many people giving small regular amounts is more reliable at times like this than are a few rich people.

• Invest in fundraising staff. shift focus of fundraising as appropriate. work smoother to be more cost effective. Communicate benefits of services to all - public, donors, Nhs, beneficiaries.

• Diversify our sources of income - our supporters’ base was not as solid as we had assumed.

• The importance of having handsome unrestricted reserves.

Reviewing activities:

• To review activities even more often to be sure value added is real and worthwhile.

• you need to be clear about which activities are the core activities you really want to protect and which are the optional extras you can stop and start more easily.

• Changes in the way that we deliver services has brought both benefits and disadvantages but it is difficult to predict all the benefits and disadvantages of changes before you embark on the change.

The impact of recession:

• That initially there appears to be no change but change kicks in a couple of months later.

• It is amazing what you can do without if you don’t have it.

• survival comes first, when times are hard. Focus has been on cash and retention of staff. Important to review and reaffirm strategic direction.

Management processes:

• The need to be agile in decision making.

• Leaving performance issues until there is a recession is not constructive.

• React quicker to the signs of downturn. This can only be done if timely management information is available. Identify those activities that can be cut either immediately or in the medium term and act.

• Keep focused on the business fundamentals and remember that cash is king.

• Plan, think and react - but calmly.

• Understand real financial results by stripping out non-recurring and one off items to reveal normalised operating results and trends.

• Control costs at all times, watch employment costs and headcount. Analyse contracts when due for renewal.

• Be more realistic in planning and give greater thought to the real needs of beneficiaries.

• Tight and timely management information is crucial, as is an eye on the contribution made by every part of the business.

Working with others:

• having long term relationships is good.

• It is easier to achieve objectives/aims if staff are fully informed of the financial implications.

• Money is the root of all evil. when it starts to dry up you find that many who you think you can trust will stab you for 10p!

yOUR TIPs ON DEALING wITh ThE RECEssIONGraph 15: Post recession growth aims by subsector

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


Be smaller and fitter

Return to pre recession

position

Expand activity

-

Graph 14: Survey respondents’ current expectations of the recession

Donations & Legacies

Grant Income

Contract Income

Trading Income

Membership Income

Demand for Services

Increase10%+

Increase0-10%

Decrease0-10%

Decrease10%+

No change



maNaGING

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publIc SectoRcoNtRactS4QUEsTION FINDINGs

what proportion of your charity’s income relates to public sector contracts? (see graph 16, page 42)

• 62% of charities indicated that they received income from public sector contracts. For half of these this represented less than 20% of their income.

• For 22% of those with public sector contracts, this represents more than 70% of their income. This includes 40% of social services charities, 31% Education & Training and 30% housing.

The remainder of this section was to be answered by charities whose public sector contract income equates to at least 20% of total income.

how many public sector bodies does your charity have contracts with?

• Of those with public sector contracts, 67% have less than 10 contracts, 25% having only one or two contracts.

• 22% have more than 25 contracts.

• 13% of those for whom public sector contracts represent under 40% of their income have more than 10 contracts. This increases to 52% of those for whom public sector contracts represent over 70% of their income.

what movement have you seen in your contract income over the past year? (see graph 17, page 43)

• 28% of charities have experienced a decrease in their public sector contract income over the last year, for 14% this is more than 10%.

• 36% have experienced an increase in their public sector contract income, for 15% this was of more than 10%.

what movement do you anticipate seeing in your contract income as a result of the changes in government policy?

• 73% of charities anticipate a decrease in their public sector contract income as a result of changes in government policy. 38% anticipate this reduction being more than 10%. Those subsectors anticipating a decrease in funding most frequently are Religion 100%, Civil Rights 83% and Business Professional Association 80%.

• 14% anticipate an increase in their public sector contract income, 7% anticipating an increase of more than 10%. Those anticipating increases in funding most frequently are International 33% and Conservation & Protection 30%.

how well informed do you consider your charity to be about likely income and expectations from public sector contracts?

• 17% of charities feel that the public bodies that they contract with are clear about the likely income for the charity from contracts and expectations.

• 21% are clear of the public sector body expectations but not of the contracting intentions.

• 36% have been given some sort of steer as to the intentions of public bodies.

• 26% have been provided with no steer. This is most common for Business Professional Association 40% and health & Medicine 33%

how much notice of any change in activity level contracted do you expect your charity to get?

• 76% of charities expect to get less than 6 months notice of changes in contracted activity for the majority of their public sector contracts.

• 42% expect to get less than 3 months notice. This is most frequent for Business Professional Association 40%, Education 36% and International 33%.


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publIc SectoR coNtRactS

how quickly could your charity adjust its cost and delivery structure to respond to a change in contracted activity of 10% / 20% / 30%?

• 61% of charities felt that they could adjust their cost and delivery structure to a 10% change in contracted activity within three months. A further 36% thought that they could adjust within 12 months.

• Only 10% thought that they could make the same adjustment for a 20% change in contracted activity within three months and a further 83% could make the adjustment within 12 months. 7% did not think that an adjustment of this size could be achieved.

• Only 4% thought that they could make the same adjustment for a 30% change in contracted activity within three months and a further 73% could make the adjustment within 12 months. 23% did not think that an adjustment of this size could be achieved.

• Those indicating adjustments were not viable were in Education and Training, health and Medicine and social services and covering all sizes of charity. Most are expecting decreases in income.

To what extent is your charity able to recover its costs from the public sector contracts within the current financial year? (see graph 18, page 44)

• 39% of charities indicated that they achieved full cost recovery on their public sector contracts, 17% achieving some degree of surplus. The subsectors where full cost recovery is most frequent are Conservation & Protection 66%, Business Professional Association 60% and Grant Making & Relief 56%.

• 61% of charities are unable to recover their full costs, including all Religion or International charities, 81% of health & Medicine and 75% of Culture sport & Recreation charities.

• 18% are unable to recover even the direct costs. The subsectors worst affected are health and Medicine whereby 33% are unable to recover direct costs and Culture sport & Recreation 25%.

The public sector has become a major funder of charities and over the last ten years has stimulated big growth within the sector, much of it through the provision of contracts. As a result the proportion of charities involved in public sector contracts is high and, for a significant minority of charities, this is their prime source of income, sometimes through only one or two contracts. so far these charities have benefited from this being a stable if cost pressured form of income, but it is clear that this is going to change. Any major reduction in public spending or review of priorities therefore has the potential to have a massive impact. how big an impact will become clearer towards the end of the year.

OUR ANALysIs

61% of charities are unable to recover their full costs on delivering public sector contracts.18% are unable to recover even the direct costs

Graph 16: Proportion of income from public sector

+10%

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


20%-40%Less than20%

40%-70% More than70%

-

--

-


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Graph 17: Expected changes in public sector contract income Graph 18: Cost recovery on public sector contracts by subsector

Civil Rights




Health & Medicine

Housing


Religion

Social Services

International


Increase10%+

Increase0-10%

Decrease0-10%

Decrease10%+

No change

--

--

-

-

-- -

-

- --

Civil Rights


Education& Training


Health & Medicine

Housing


Religion

Social Services

International


Full cost recovery

More than full cost recovery

Direct costs recovered only

Unable to recover direct costs

90% or more of full costs

recovery

- -

- -

-

--

- - -

publIc SectoR coNtRactS

The reduction in public spending has been anticipated for some time and this is reflected in the results of the survey, as most charities involved in public sector contracts expect this source of income to reduce, particularly away from the priority areas of overseas aid, education and health. however, both education and health are now undergoing major changes in the way that they operate, so any comfort of less pressure on funding must be balanced against increased uncertainty over what will be commissioned in these areas. The flow of information from public sector commissioners to charities about their contracting intentions has been sketchy, largely because in the midst of policy change and strategic reviews the commissioners do not know what their own position will be. however you look at it, 2011 is likely to be a more difficult year, not less.

It appears that if any reductions in activity are under 20%, most charities will be able to adjust, given sufficient notice. But for many the expected notice periods are relatively short and there may be difficulty getting even this level of notice if the intentions cannot be determined until after the spending review; the change is expected from April 2011.

Common sense should dictate that in some cases any changes are deferred to allow a sensible wind-down or transfer, otherwise this could prove to be chaotic, and the ones losing out most will be the intended beneficiaries. If the reductions go above 20% an increasing number of charities of all sizes will find it difficult to continue to operate – at least with their existing business model. This could result in charity mergers and wind-ups.

Recovery of costs on public sector contracts remains a massive issue, with a high proportion of charities not being able to recover costs and a substantial minority unable to recover even direct costs. The public sector cost pressures are likely to squeeze the sector further but, with increasing difficulty in securing other forms of funds as a result of the recession, the scope for charities subsidising these services will be less, even when they are wholly consistent with the charities’ objectives and might be done by them even if the contract was not in place.


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In which areas does risk management have an influence? (see graph 20, page 48)

• Overall there is little change in the use of risk management, with it being used for most key decision areas by most charities at least to some degree, increasing in some areas and reducing in others.

• 95% or more respondents reported using risk for strategy and priority setting, project and option appraisal, operational plans and investment decisions and reserves policy.

• Over 90% reported using risk for reserves policy decisions.

• Over 80% reported using risk for contract renewals, recruitment decisions and funding bids.

how would you describe risk management at your charity?

• 34% of respondents described their risk management as embedded in the charity and working effectively. This is increased slightly from 2009 (26%).

• 42% described their risk management as part embedded and giving some benefit, down from 45%.

• 18% described their risk management as just involving periodic reviews of risks and controls, down from 20%.

• 6% described their risk management as a once-a-year process, down from 8%.

• Only one charity reported that risk management was not in place and they had no intention to introduce it.

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QUEsTION FINDINGs

how often does the management team and trustees review and confirm that your risk and control assessment is still appropriate? (see graph 19, page 47)

• Both management and trustees are reviewing risks and controls less frequently this year, with 48% and 25% respectively conducting reviews at least quarterly (down from 57% and 35% last year). This is more in line with the 2008 position. however, many of those not reviewing risks regularly have been developing new strategies.

• Consequently the proportion of managers reviewing risks annually or less has also increased, at 52% for trustees and 32% for managers.

• 6% of respondents indicated that their trustees did not even review their risks annually and 5% reported that managers did not. Many of these were the same charities and a number of these indicated that risk management was a strong or limited influence on their decision making.

which of the following does your charity have in place? (risk policy; risk register showing controls; business continuity plan; fraud policy; whistleblowing policy; testing of internal controls)

• There are still a number of gaps in the basic risk management components for many charities and little change overall.

• 32% of respondents reported that they did not have a risk policy. This is increased from 30% in 2009.

• 81% reported that they have a risk register showing controls. This has improved from 80% in 2009.

• 43% reported that they do not have a business continuity plan. This has reduced from 46% in 2009.

• 48% reported that they do not test the operation of their internal controls. This has reduced from 51% in 2009.

• 53% reported that they do not have a fraud policy. This is reduced from 57% in 2009.

• 37% reported that they do not have a whistleblowing policy. This has reduced from 41% in 2009.

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OUR ANALysIs Risk management is being used by the sector for all of the key decisions and for most charities is a well established and constantly refining process. Although some of the risk management formalities such as trustee review of the risk register have declined in frequency, the evidence is that the real risk management of assessing and seeking to manage the issues has improved, and is hopefully more embedded in the revised strategies that have been developed.

The proportion of charities considering that risk management is embedded has also increased again to its highest level, now covering more than one third of those completing the survey, and more than

three quarters of respondents have now got risk management part-embedded. If anything the recession seems to have given risk management a boost.

In order to get the most from the investment in risk management and the strategic reviews that charities have carried out, the next step for many is to be more trusting of what they have put together, formalising arrangements to ensure that the controls that they rely upon remain in place, and seeking to feed the results more robustly into a greater proportion of the decision making. The tougher the decision to be made, the more important that the resulting arrangements work, and thorough consideration of risk and scenario planning can help to achieve this.

Graph 19: Change in frequency of review of risks by trustees and managers

Graph 20: Influence of risk management on charity decisions

The proportion of charities without some of the basic components of risk management in place, such as risk registers showing controls, the testing of controls and business continuity plans, continues to reduce, but slowly, with still more than half reporting significant omissions. hopefully the lack of arrangements in some charities will not cause them difficulties, although the incidence of attempted organisational fraud appears to be on the increase.

Even for those that have established fraud policies and business continuity plans, it is likely that these will need reviewing in the light of new strategies and changing threats and arrangements. International charities in particular also need to be alert to the implications of the Bribery Bill for their internal control and training needs if they are to avoid fines and reputational damage.

0

10

20

30

40

502010 Trustees

2009 Trustees

2010 Managers

2009 Managers

Monthly Quarterly 6 Monthly Annually Annual +5

10

15

20

25

30

35

Monthly Quarterly 6 Monthly Annually Annual +

%%

Limited

None

Strategy Project appraisals

Operationalplans

Investmentdecisions

Reservespolicy

Contractrenewals

Recruitmentdecisions

Funding bids & fundraising

Strong

0

10

20

30

40

50

60

70

80

%


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PKF (UK) LLP is a leading firm of accountants and business advisers with more than 1,500 partners and staff operating in 23 offices in the UK mainland firm.

Our dedicated charity experts work with more than 500 charities, ranging from large and diverse national organisations to small charities. Many of our team act as trustees or have worked as accountants in charities, giving them first-hand understanding of the issues they face. we are committed to helping charities and not-for-profit organisations excel at what they do best – helping others. we offer:

• In-depth sector knowledge and supportive

relationships that deliver long-term value for money

• Understanding of, and empathy with, your organisation’s culture and objectives

• Practical solutions to help you achieve your goals, tailored to the requirements of both executive management and trustees

• Effective communication to ensure issues are dealt with promptly and efficiently

• Easy access to partners and staff whenever it is required.

As well as audit, internal audit, tax, accounting and risk management, we also advise on pensions, trustee development, mergers, strategic planning, governance and management of change.

Risk management is an area in which we specialise. Tailored to our clients’ sector, size, objectives and stage of development, our services are designed to provide practical support where charities need it most. These include: setting risk policies and framework; identifying, assessing and prioritising risks; evaluating existing risk mitigation controls and monitoring; reducing risks outside the charity’s direct control; embedding risk management and implementation to maximise its benefits and staff and trustee training.

PKF (UK) LLP Farringdon Place 20 Farringdon Road London EC1M 3AP Tel 020 7065 0000 Fax 020 7065 0650 Email [email protected] web www.pkf.co.uk

pkf chaRItIeS team


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the chaRIty fINaNce DIRectoRS’ GRoupThe Charity Finance Directors’ Group (CFDG) is an umbrella charity with the aim to advance public education in and promote improved standards of management in charities. Our vision is a transparent and efficiently managed charity sector that engenders public confidence and trust. with this aim in sight, CFDG delivers services to its charity members and the sector at large which enable those with financial responsibility in the charity sector to develop and adopt best practice.

Founded in 1987, CFDG today is a dynamic network of professionals in charity finance. started initially by a group of finance directors of large charities who felt they would benefit from sharing information and cooperating in some areas, the organisation has grown to currently over 1,600 members. As of early 2010, CFDG’s membership manages a total of £17.53 billion of charity income.

The culture of sharing and contributing to the wider sector beyond the individual charities has remained the same and builds the strong backbone of CFDG’s activities today.

CFDG is active in the policy arena as well as in education and training and provides information and support for members and the wider charity sector on different levels.

we work with other organisations, regulators and charities to input charity expertise into the regulatory process, and to develop best practice in charity management. In this quest, CFDG is represented on many committees and working parties established by professional bodies and government departments, including the sORP Committee.

CFDG members benefit from a variety of services, such as a regular newsletter, free members’ meetings and a lively networking framework. Most importantly members can contribute through CFDG to regulatory consultations, share knowledge with peers through the electronic CFDG document library, and share some of the financial expertise of their organisation with others, for the wider benefit of the charity sector.

CFDG holds a number of annual conferences including a Risk Conference in November which consolidates expertise in risk planning and prevention and ensures that delegates attending leave with a clear understanding of the implications involved. Our annual Risk Conference is on the 17th November 2010 at the Royal College of surgeons.

Although administered from London, CFDG has a number of regional groups, run by a committee of members who arrange a series of meetings each year. The regional group in the south west and wales is supported by PKF.

Charity Finance Directors’ Group 49-51 East Road London N1 6Ah Tel 0845 345 3192 Fax 0845 345 3193 Email [email protected] web www.cfdg.org.uk

www.pkf.co.uk10-0346 September 2010

PKF (UK) LLP, Farringdon Place, 20 Farringdon Road, London EC1M 3AP DX 479 London/Chancery LaneTel: 020 7065 0000 Fax: 020 7065 0650

PKF (UK) LLP is a limited liability partnership registered in England and Wales with registered number OC310487.

A list of members’ names is open to inspection at Farringdon Place, 20 Farringdon Road, London EC1M 3AP, the principal place of business and registered office. PKF (UK) LLP is authorised and regulated by the Financial Services Authority for investment business activities. PKF (UK) LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.

PKF (UK) LLP is a leading firm of accountants and business advisers with more than 1,500 partners and staff operating in 23 offices in the UK mainland firm. Our dedicated charity experts work with over 500 charities, providing a wide range of services including audit, tax, governance, trustee training, financial reviews, strategic planning and risk. Our risk management specialists have worked with numerous charities to help them develop their risk management to achieve the right balance between innovation and exposure. www.pkf.co.uk

PKF (UK) LLP operates a code of conduct to ensure that all types of data are managed in a way which complies with the Data Protection Act 1998. If you do not wish to be informed about the services we offer and forthcoming events, please contact your local PKF office.

CFDG specialises in guiding other charities in their accounting, taxation, audit and other finance-related functions. It aims to deliver services that are valued by members and enable those with financial responsibility in the charity sector to develop and adopt best practice. It offers a full training and events programme, information notes and active networking. Its members share their knowledge, skills and experience to develop and promote good practice and find solutions to problems. CFDG also informs and lobbies government, professional and other bodies in relation to legislative and regulatory issues.www.cfdg.org.uk

Documents

Managing Risk Report 2010 LR v2 - PKF International uk llp managing risk... · 2011-01-12 · charities share their risk assessments with trustees and most are utilising risk for