b2: how to ask difficult questions about your charity's finances

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HOW TO ASK DIFFICULT QUESTIONS ABOUT YOUR CHARITY’S FINANCES

SPEAKERJIM CLIFFORD OBE PARTNER, HEAD OF ADVISORY AND IMPACT, BATES WELLS BRAITHWAITE

NCVO Conference

How to ask difficult questions about your

charity’s finances

October 2017

Jim Clifford OBE Partner, Head of BWB Advisory and Impact

T:+44 (0)20 7551 7860 [email protected]

mailto:[email protected]

Welcome and introduction

1 /

Presenters:

Jim Clifford OBE

Workshop structure and objectives for the day:

Structure

Understand how to review accounts and issues to look for

Techniques for structuring enquiry

Understand how to review budgets

Understand how to test and challenge investment decisions

Objectives

Develop a framework for reviewing accounts to target enquiry

Giving techniques and styles of questioning

Helping you to ask challenging questions about the future as well as the past

Session 1 – Reviewing accounts

2 /

Just checking… what do financial statements tell us?

Profit and Loss/Income and Expenditure account: shows transactions that relate

to the period (or parts of transactions, if spread across several periods)

Balance sheet: a statement showing what the company owns, is owed and owes to

others

Cash flow: shows a record of cash received and paid in the year

Reviewing accounts: fundamental principles

Financial performance

Using income and expenditure data

Is income growing or declining?

Are costs increasing or decreasing?

Is the charity generating a surplus or is there a deficit?

Are charitable activities ‘profitable’ or is the organisation subsidising loss-

making activity?


3 /

Reviewing accounts: fundamental principles (cont.)

Solvency

Using balance sheet data

Key tests:

Does the charity have positive net assets/funds?

Does the charity have positive net current assets (current debtors plus

cash less current creditors – remember to adjust for restricted funds)?

Does that charity have sufficient cash/cash flow to meet its commitments

as they fall due?

Other issues:

Is the charity investing appropriately in fixed assets (e.g. IT equipment)?

Are debtors being collected in a timely manner?

Are creditors being appropriately managed?

Reserves and reserves policy


4 /

Reviewing accounts: fundamental principles (cont.)

Risk

Some key issues:

On what external factors do we rely for our income?

Are we exposed to potential cuts by public bodies or grant makers?

What external factors might affect our costs (rent reviews, oil prices,

minimum wage, bank interest rates etc.)?

Are our debtors solvent?

When are our debt repayments due, and can we meet them?

Do we depend on regulatory compliance for our income?

To consider:

Are we taking steps to manage risks

Do we review risks regularly enough to identify that action is needed?

Session 1 – Exercise 1

5 /

Reviewing accounts: applying the fundamental principles…

Exercise 1

Session 2 – Structuring your enquiries

6 /

Just checking… what does materiality mean?

Definition

The item accounts for a significant proportion of income/cost/surplus

An inaccuracy could either significantly change or turn a surplus to a deficit

(or vice versa)

Each organisation may have its own value or percentage thresholds, as

will its auditors (e.g. items equivalent to 5% of income or higher)

Why does it matter

Focus enquiry on items that are really important and/or strategically

significant

Avoid being perceived as awkward/too far into the detail

Encourage others to focus at items that aren’t material – delegated

authority and/or use of sub-committees is helpful for this.


7 /

Types of enquiry 1 – Content/background

Examples

Asking what an item relates to

Asking what an item includes

Asking about the source of information and/or assumptions made in

underlying workings

Why is this useful?

First seek information and/or confirmation before launching a more

challenging question

An ‘obvious’ question that can easily be overlooked in order to ask

something more ‘challenging’

A good way to open discussion


8 /

Types of enquiry 2 – Reality vs Expectations

Examples

Asking how an item is expected to change (or not) in future

Asking why an item has changed more/less than a stated expectation

… and form your own reasonable expectations… what do you expect to see

based on past performance: ask why reality is different.

Why is this useful?

Gives better context for enquiry than simply ‘why has this gone up/down?’

Avoid spending time discussing expected changes


9 /

Types of enquiry 3 – Variances

Examples

Asking how an item compares to the budget for the year

Asking for reasons why an item is below/above budget…but remember

materiality!

Asking why an item has changed compared to the previous year.

Why is this useful?

Holding executive management to account for budget-setting

Form a view on trends that may lead to changes in future

Identify systemic issues with budget setting (e.g. tendency to predict

under-performance)

…Remember that over-performance compared to budget deserves as much

enquiry as under-performance


10 /

Exercise 2 (5 minutes)

Proposing some questions

Using the three question styles we’ve looked at, propose two questions

you would ask of the finance team, and give your reason for asking each

question.

Session 3 – Challenging your budget

11 /

Four key types of enquiry

1. Trend analysis

Compare budget trends to historical trends: are they consistent… should

they be (what did you expect to see)?

Review projected ‘market’ trends (qualitative and quantitative): is the

budget logically consistent (e.g. if policy statements show funding cuts,

does the budget show a reduction in that line item?)

If either or both of the above have been undertaken, is the comparison

appropriate and meaningful?


12 /

Four key types of enquiry (cont.)

2. Necessity

Typically more applicable to cost items.

If an item of expenditure is included, do we need it (or need it for the full

amount budgeted), and what income or social value is linked to it to justify

the spend?

3. Known changes

If an event is known to be occurring, or is certain to occur: is it shown in

the budget? (e.g. if we know a management post will be vacant for the first

three months – have we shown the reduced cost, or kept the full annual

cost?)

…but be careful to differentiate between what is possible, probable or

certain.


13 /

Four key types of enquiry (cont.)

4. Lessons learned

If we have noted a discrepancy between actual results and budget in

previous periods, what has been done to account for that in the latest

budget? (e.g. we planned cost savings last year, but they couldn’t be

delivered: do we still show the reduced budget in the hope that this year

will be different?)

If we have observed that a line item is difficult to predict, how has is been

estimated and have we considered other scenarios?

Remember to challenge general ‘contingency’ provisions in accounts:

either a specific risk is known and should be adjusted in the relevant line,

or the contingency risks giving a general approval to exceed cost budgets

across the board…no actual results will show a contingency line item!

Session 3 – Exercise

14 /

Reviewing a budget

Exercise 3

Session 4 – Investment decisions

15 /

Two key decision types – some questions to ask

1. Start/Stop/Continue activities

Is the activity financially sustainable (at least breaking even)?

Does it stimulate other activities to be more strongly viable (indirect

financial contribution)?

Is its social value of such importance that subsidy from other viable

activities is (or would be) justified?

…if any or all of the above are in doubt, can it be modified to improve the

position?

…and if it can’t be, should it be stopped and/or replaced with something

else?

Session 4 – Investment decisions

16 /

Two key decision types – some questions to ask (cont.)

2. Investment decisions

Is the business case for the proposal robust?

What risks and scenarios have been considered, and what is the potential

financial downside of these?

How will risks be monitored and what actions can be taken to mitigate the

effects of these?

How strong is the social value case for the proposal?

If we do this, what can’t we do as a result?

Do the forecasts make sense (applying the approaches from sessions 1 to

3)?

Does any proposed external finance match to the project type? (e.g. don’t

use an overdraft to fund the purchase of a building…)

Have we taken action to challenge/negotiate the finance terms offered?

Some final thoughts…

17 /

The role of a finance and risk committee as a forum to test and challenge

financial information

Consider the impact of question style and forum on those to whom it is

addressed (will they become defensive or open as a result)?

Bates Wells & Braithwaite London LLP

10 Queen Street Place

London EC4R 1BE

www.bwbllp.com

Tel: +44 (0) 20 7551 7777

b2: how to ask difficult questions about your charity's finances

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