Managing financial sustainability in hospices

Reserves are there to provide the hospice with resilience and therefore can be spent to help cope with unexpected events, especially at times of uncertainty. However, in utilising the hospice’s reserves, the board should identify which of the funds or assets have limits on their use. Whilst most funds are likely to be unrestricted in a hospice, restricted donations and legacies can also be received, so it is worth reviewing how these can be best utilised.

Additionally, Boards should assess if the hospice has any designated funds earmarked for specific purposes and, if so, can these designations be released to fund the general operations of the hospice?

To ensure they remain effective, reserves policies should be reviewed regularly by the Trustees. The Charity Commission guidance CC19 explains “A good reserves policy gives confidence to stakeholders that the charity’s finances are being properly managed”. 

A reserves policy should consider the key internal and external risks facing the hospice. For example, if funding is a core risk, is it adequate to hold on to more reserves or in such a time have the appetite to utilise some of the reserves towards investment in fundraising for longer term income generation? Key questions should be considered by the Board, such as how the reserves policy links with operational requirements and financial strategy, and what are the uncertainties of assumptions and operating realities of the external environment?

For advice and guidance on forming or reviewing your reserves policy, we recommend reading our guide to Better Reserves Management.

Managing risk for hospices is crucial and the risk register should be reviewed regularly to ensure the principal risks are being captured and mitigations are carefully considered. Once the risks are identified they will need to be assessed, prioritised and categorised based on their significance and likelihood. Risks should not be reviewed in insolation; understanding how risks interact, “risk contagion”, is key to ensuring effective risk management. For example, if the risk around declining fundraised income occurs simultaneously as a risk associated with unexpected increasing costs (for example with the recent National Insurance cost increase), the significance of the two risks combined would have a much higher impact and therefore could require immediate action.

We explore the concept of risk management and provide detailed guidance in our Better Risk Management guide. There is also an accompanying podcast available to listen to now.

Management of liquidity is key for a hospice. Changes in the environment can impact on the timing of receipts and payments and therefore it is important that the future cash flow projections adequately reflect the potential timing. The forecasts should be considered on a line-by-line basis with all inflows and outflows shown on a monthly basis and linked clearly to the unrestricted cash balance. Monitoring cash flow and forecasting on a regular basis can help manage working capital needs. For example, while the timing of ICB receipts is more certain, considerations around the cash inflows from fundraised and legacy income can be variable in both value and timing.

An outlook of 18 to 24 months can allow decisions to be made sooner rather than later to manage costs and implement change. In some cases, while levers can be pulled, the impact for cost savings will not be instant. For example, the net impact of redundancies and reduction in patient care services, or closure of a retail unit, is not likely to be seen until the following financial year.

Budgets should also be reforecast at least quarterly and updated for changing circumstances internally and for the external environment.

As part of your planning, levers that you can pull on when needed, should be identified and outlined with a specific plan for use. In particular, prioritising which need to be actioned first. For example, what projects can be delayed if needed, or capital works that are not essential or not donor funded?

Additionally, when were service contracts last reviewed that can be renegotiated? If a restructure is required, what impact will it have on the ability to deliver service to patient care, and is this a temporary measure only? Where else can costs be saved in the short term? When levers are identified, they should be incorporated into the forecast models as part of the scenario planning.

In an uncertain environment, stress testing financial models is a critical management tool. For example, if there was a further reduction in fundraising income or a lower level of legacies received by a larger percentage than budget, how does that impact the bottom line and reserves available? Stress testing and sensitivity analysis can further show the tolerance in the budget and forecasts and determine at what point decisions need to be actioned by the board to pull any levers identified.

Predictable income streams, like retail, enable hospices to plan financially. But to be effective they require continuous reporting by unit to highlight trends, results and running costs. Use of technology in analysing this data on a timely basis can be helpful. Management should be asking, which units are performing well and what can be learnt from the local demographics? What processes are operating effectively for efficiency in one unit that can be shared across other retail units?

As hospices manage their way through these uncertain times Boards must remain agile. This requires regular and effective reporting. Management need to review the way in which they report to Boards, information needs to be relevant, digestible, and focused. This will mean financial models need regular updates, so Boards are able to react faster and with more certainty. 

While financial sustainability is focused on cost management, cash flow and forecasts, strategies to maximise available opportunities must be explored concurrently with the view to potentially increase revenue, in line with the hospice’s risk appetite. Below are just some examples of these strategies:

• investment in fundraising platforms can enable hospices to reach new funders, engage with supporters and generate new regular giving lines, but this investment needs to be planned and the timing of cashflows understood
• establishing legacy endowments can be a way of getting donors committed to funding the hospice and in the long term provide a more predictable source of income
• retail units can be used for more than a shop front. They can be used as community hubs, offer workspaces, or where space is greater than the need it can be sublet
• while a hospice belongs to its local community, there are repeat activities across the sector and management teams should be exploring innovative ways to collaborate across the sector. Examples could include back-office functions, buying groups and also shared services.

Any investment made by the hospice should be incorporated into the forecast model and income generation assumptions from this should be challenged by the Board.