According to the World Economic Forum its economic impact is already more severe than SARS (estimated global economic impact of $50 billion) or MERS (estimated global economic impact of $8.5 billion). Evidence from other countries where there has been a significant outbreak suggests a slowdown in economic activity either as a result of governmental response to the epidemic (e.g. quarantine) or arising from changes in individual behaviours (e.g. fall in consumer confidence). For the Chancellor, ready to deliver his first budget, this is one more factor in addition to the uncertainties arising from Brexit.
The impact on charities will very much depend on the specific sectors in which they operate and therefore their activities as well as how their income is raised. For example, a cultural charity may be impacted by a drop in visitor numbers, whereas a care charity may be mostly impacted by its unavailable workforce.
The reality is that we do not know what the reality will be. It is therefore imperative to be as prepared as possible and think carefully of the implications of different scenarios and to factor these into the future planning. Boards and management need to recognise that it is not business as usual and there are new challenges that require specific attention. Most charities will have disaster recovery or business continuity plans. This is a good starting point for considering what factors need to be taken into account but most of these plans focus on dealing with the impact of significant one off events, such as inability to work from an organisation’s main office, rather than the challenges presented by an epidemic which will be much broader and deeper.
In the medium term, charities will need to revisit their strategies to ensure that these are still ’fit for purpose’ and achievable in light of the impact of the current uncertainties on their finances. In the first instance, scenario planning and decision trees are important tools which can be employed. Care needs to be taken that the focus is on shorter financial planning cycles given that it is unreasonable to make accurate assumptions about the future.
Scenario planning is seen as an important tool in helping organisations cope with the uncertain environment. The exercise requires placing values and analysis on different scenarios and this does require some out of the box thinking. Scenario planning will enable Boards and Management to gain perspective on critical issues facing the charity and make decisions about capital investments and budgeting. It will also enable the organisation to identify those events that will create substantial negative impacts for the charity allowing consideration of appropriate contingencies in the budgeting. Care needs to be taken that the scenarios are not treated as forecasts and the range of scenarios is not simplistic – for example optimistic and pessimistic and that the scenarios aren’t unconsciously biased to thinking to what we know and wrongly thinking that the future will resemble the past or to extrapolate on the basis of what is happening now. Good scenario planning requires many perspectives and this involves engaging with a diverse team across functions in the charity. It should also include external perspectives to identify threats and opportunities that may have been overlooked.
Decision trees are also helpful so that managers and Boards can structure and consider the sequencing of their decisions.
Consideration of linked risks and the 'domino’ effect or risk ’cascades’ should be made. Most major value losses involve the interaction of more than one risk. Similarly, the exposure to a portfolio of risks needs to be considered. An isolated concentration on value at risk could result in not spotting ‘risk contagion’ – where one low impact risk leads to another and another so that the cumulative impact is catastrophic.
Organisations that will survive will be those led by individuals with the right knowledge, skill, and experience to act decisively when the time is right. It will be important to identify those who hold pivotal roles in your charity and ensure they regularly meet to share their knowledge. Providing an opportunity to discuss and deliberate issues and challenges, make decisions and to then act together to successfully communicate and implement those decisions.
Charities must be ready to make decisions within shorter time scales. The two tier structure of Trustees and Executive can promote sub-optimal decisions made on a consensus. There may be an elongated path to decision making which can cause delay to the charity’s immediate challenges and opportunities. Therefore, there should be a re-evaluation of the charity’s decision making protocols, in particular factoring in that some key decision makers may themselves be unavailable for periods of time in which it is critical to making timely decisions.
There will also be a need for continuous horizon scanning and the sharing of information between the senior management team and Trustees.
There is a need to monitor and track the key indicators that give early warning of the imminence of a particular scenario. These indicators should be seen as signs of potentially significant change and need to be selected and monitored with great care. Each organisation may well have very different choices of indicators - for example, those with significant earned income need to consider the impact of a slowing or stagnant economy whereas those in service provision will need to consider resourcing challenges as a result of staff absenteeism. Action plans for different scenarios should be developed and trigger points should be set and monitored. There may be a need to divert resources from carrying out peripheral activities to core or essential activities.
As income levels are threatened and additional costs arise, cash flow and reserves management inevitably demand more attention. The uncertainty and volatility of income may dramatically increase the exposure to liquidity risk, as will additional cost impact of changing operational models. Charities with low liquidity will be the ones most likely to be significantly impacted. The issue is how is the reduction in reserves is going to be managed. Are funds going to be obtained by borrowing, selling investments or drawing down on cash balances? Some charities may need to dip into reserves to manage cash requirements.
This was first published on the Charity Finance Group blog on 9 March 2020.