Kate Sayer from Sayer Vincent offers advice to charities and social enterprises on how to embrace and understand risk when it comes to taking on social investment. Sayer Vincent is a firm of chartered accountants with a focus on charities and social enterprises.
Most boards are concerned about how borrowed funds will be repaid, so this is the first point to address. The board needs to understand the business model used to deliver the organisation’s purpose.
For many charities and social enterprises, it is important to scale up activities to meet the needs of beneficiaries or services users quickly, rather than make them wait patiently while the charity raises the funds. Loan funding or social investment can help an organisation to scale up to deliver.
So how should boards think about such decisions?
Most boards are concerned about how borrowed funds will be repaid, so this is the first point to address. The board needs to understand the business model used to deliver the organisation’s purpose. Boards should ask about the reliability of the income, whether the demand for the service is proven, whether there are competitors who might take away demand, whether the model of delivery is tried and tested. Borrowing funds to run an activity that is familiar territory to the organisation is inherently less risky than a completely new venture.
There is no substitute for proper business planning, but it should not be seen as a predictor of the truth. It can be impressive to see huge spreadsheets and sophisticated models, but boards should not be intimidated by these. The simple things are the most important and are the same for social businesses as any other enterprise. Find out what key assumptions have been made in developing the financial plans and then ask for these to be tested. If demand for this service is lower by 10%, do we still generate enough income to cover our costs? Vary one assumption at a time and work out the financial impact. This gives you a proper view of financial risk that you can measure and evaluate.
Payment by results or performance related payments are not necessarily a high-risk factor – it depends on how they are structured and how the targets are set. If the results-based payment is a small proportion of the overall fee for a service, then this is much lower risk.
Some boards are more comfortable with large cash-backed reserves, as this provides a safety net for a whole range of risks and saves thinking more about the nature and likelihood of the risks. In real life, it is highly unusual that a whole set of unforeseen events transpire at the same time, although it does sometimes happen – but then it is unpredictable. No-one can foresee or plan for such circumstances. What we can plan for and manage are smaller deviations from the plan or expected events. Pro-actively responding to events as they happen will reduce the size of the financial impact of any single risk factor. Monitoring should focus on the important assumptions highlighted at the business planning stage – these provide your best indicators of whether things are going to plan. Look for the early warning signs and take appropriate action.
Boards might find it useful to look at a free resource published by Charity Finance Group and authored by Sayer Vincent “Rethinking risk: Beyond the tick box”. Free to download at www.sayervincent.co.uk.