As falling donations and rising costs squeeze charity budgets, reactive ‘salami slicing’ is no longer viable. This article highlights key points from our recent webinar and explores how strategic restructuring and dynamic Excel tools can help finance leaders move from crisis management to building mission-led resilience.
In our recent webinar ‘Strategic restructuring for charities: focusing resources for impact and resilience,’ experienced charity treasurer John Tennent reminded us why the charity sector is struggling financially. On the one hand, income is under immense pressure, with a recent Charities Aid Foundation report revealing that public donations fell by 10% year-on-year; a staggering £1.5 billion drop. On the other hand, operating costs are soaring due to high inflation, rising energy prices, and significant increases in the real living wage and National Insurance contributions.
For many finance professionals and treasurers, the comfortable surplus of the past has vanished. Simply ‘salami slicing,’ i.e. taking a little bit off every budget line, is no longer a viable strategy as it can leave functions unable to fulfil their core purpose. To survive and remain resilient, charities must move beyond reactive measures and embrace strategic restructuring.
Understanding your charity’s true financial position
A common pitfall for charity boards is confusing reserves with liquidity. As Naziar Hashemi, Head of Social Purpose and Non Profits at Crowe, pointed out, accounting policies can often impact your reported reserves without actually helping your cash flow. For example, early recognition of a legacy can boost reserves on paper, but it doesn't put cash in the bank if the funds are tied up in probate.
It is vital to distinguish between the cash flow test (can the charity pay its debts as they fall due?) and the balance sheet test (does the charity have enough assets to cover its liabilities?). Furthermore, charities must be very careful with restricted funds. These funds are protected by trust law and must be available in a liquid enough form to meet their specific purpose. A cautionary example is a charity that had millions in restricted funds but found most of that value was tied up in fixed assets like buildings, making it difficult to spend the money as donors intended.
Naziar highlighted that assessing financial health requires viewing risks, reserves, and going concern in an integrated way. To ensure forecasts remain realistic, finance leaders must actively interrogate internal bias where managers and trustees overestimate positive outcomes while underestimating negative effects. Ultimately, maintaining a true picture of the charity’s position relies on high-quality management information and taking timely action to respond to financial shortfalls quickly.
Strategy: the art of choosing what not to do
In a crisis, the instinct is often to try and do everything with less. However, true strategic restructuring requires ‘selective forgetting’ of the past to create a viable future. As strategist Michael Porter famously noted, the essence of strategy is choosing what not to do.
Charities are mission-driven, which makes letting go of projects incredibly difficult, often leading to anguish. To combat this, finance professionals should lead decision-makers through rigorous scenario planning.
The goal is to move away from focusing only on ‘big bets’ that carry too much risk and toward actions that provide reliable impact. Ask questions like:
- Why do we do this?
- Who is it for?
- Can we do it cheaper, faster, or better through technology or collaboration?
Mastering the tools: dynamic modelling in Excel
While the theory of restructuring is essential, the webinar’s most practical takeaway for many delegates was John Tennent’s approach to financial modelling and scenario-planning. Many charities build deterministic models, i.e. static spreadsheets where changing one number requires manually updating ten others to get a valid answer.
Instead, John advocated for building a dynamic model where a change to a single assumption, such as a 2% drop in donations or a 5% rise in energy costs, instantly generates a valid, updated result across the entire 3-5-year plan. This provides the early warning system boards need to plan effectively.
In the webinar, John's model uses three techniques to achieve this:
- A clever engine: handling multiple scenarios and permutations within a single model, rather than managing a multitude of different files.
- Dynamic linking: using volume drivers (like the number of beneficiaries) to automatically scale related costs.
- Scroll bars: these allow users to visually flex key assumptions up and down to see the impact on the charity’s surplus or deficit in real-time.
Don’t miss out on these tools. In the webinar recording, John walks us through a case study (‘The Care Team’). Seeing the scroll bars in action makes sensitivity analysis feel less like a chore and more like a strategic superpower. By mastering these dynamic tools, you can move your charity from a position of uncertainty to one of calculated resilience. And yes – John even shares his dynamic spreadsheet with delegates.
