Financial sustainability – where are we now?
Date: 06 November 2020
Author: Tom Wilson, Haysmacintyre
Since the first national lockdown started on 23 March 2020, most organisations in the sport and physical activity sector – as in all others – have been on firefighting duty and constantly reviewing their financial sustainability. The word of the year has been ’uncertainty‘ for many boards. As I write this at the start of the second national lockdown, it seems that uncertainty is here to stay, and organisations must continue to adapt. Continued governance focus needs to be on financial sustainability into the medium term, together with strategic reserves planning. In this blog, I highlight some thoughts on areas boards should concentrate on now to re-energise their financial governance focus.
Constantly challenge your situation
One of my main observations from clients in the sector is that every organisation is different in crisis. In ’normal‘ times, there are significant similarities across the sector, however, the pandemic has highlighted several nuanced differences across similar organisations. The type of sport, reliance on commercial revenues, benefits given to members, and even seasonality can make huge differences to the sustainability of each organisation.
In the national governing body world, I am aware of two organisations whose memberships have increased during the pandemic because of the nature of the sport, whereas others continue to struggle with significant uncertainty in this area. Additionally, some are highly reliant on commercial or events revenue that has been significantly disrupted indefinitely.
With these variances across the sector, now is a good time to take a critical second look at your forecasts and challenge your assumptions. There are many questions board members should ask themselves, some of the most important include:
- Are we focused enough on cash flow?
- What has changed (if anything) because of the second lockdown?
- Will our income streams hold up, and over what time frame?
- How did we do with our original assumptions, and do they need to be tweaked?
- Do we need to cut further costs?
Most organisations have completed some scenario planning particularly in the early days of the pandemic, however, scenario planning in advance of an adverse (or favourable) event will help monitor and respond to the situation. It will also allow boards to make decisive and well thought out governance decisions as more information is known.
As I have said in the previous section, a well-challenged base case of what you think will happen is key, however, what if it doesn’t occur? Testing this against best and worst-case scenarios and subsequent impacts need to be discussed. Worst case is the most important, but it is also worth planning for a better outcome; if your finances are better than expected, it causes other stakeholder management issues and may prompt giving back where appropriate.
Reserves planning and strategy
In my view, are more important than ever and now is the time to really challenge them. We still see rather old-fashioned policies that are based on an arbitrary number of months of expenditure. Policies should be linked to financial risk and to strategy; this again will mean that different organisations have different policies, a one size fits all approach is not applicable.
Ask questions to build a which is relevant to the current circumstances, such as: based on your forecasting how much do you need in order to survive through the pandemic? What other financial risks do you have and what is the cost if they were to occur? Now may well be the right time to use reserves if you are able to?
How we interact with our key stakeholders such as members and staff is also changing drastically as a result of social distancing and working from home policies; it is therefore, a good idea to refresh strategy regarding technology and digitisation. Is now the time to invest (and use some of your reserves) to create efficiencies and to be fit for the future? Reserves for both sustainability and investment should be discussed to develop a more relevant policy.
Completing the year-end compliance process is more challenging than ever, mainly due to Covid-19, but also a changing regulatory environment. Most year-end processes are occurring remotely, and this can cause some logistical challenges both from completion of compliance work and the governance process leading up to AGMs. Organisations should consider their usual sign off timetable and whether it is appropriate to amend it.
Going concern should be a key topic of conversation for boards. The assessment of going concern is a primary responsibility of the board and should be assessed formally prior to signing financial statements. To do this, boards should evaluate their cash flows for at least a period of one year from when the accounts are due to be approved. These forecasts should be challenged, particularly regarding the assumptions that are included within those forecasts. This should then inform opinions on and comfort with the disclosures regarding going concern.
Outside of the board room, going concern is likely to be a key focus of your external audit as well. There are changing International Standards on Auditing for both going concern and accounting estimates, that are relevant for year ends 31 December 2020 onwards. Auditors, and therefore sports organisations, will have to adapt to these changes.
Coronavirus Job Retention Scheme
Further to the Chancellor's announcement made on 5 November 2020, the Coronavirus Job Retention Scheme (CJRS) will be extended until March 2021. The key points from the extension are:
- The Government will pay up to 80% of an employee’s salary
- A monthly salary cap of £2,500 will apply
- The employer will be responsible for paying National Insurance and pension contributions
- The CJRS will be extended to include employers and employees who did not previously use it
- Employees must be registered on an employer’s PAYE payroll by 23:59 on 30 October 2020
- The Job Retention Bonus previously proposed will not be paid in February 2021 as originally planned. However, a further retention incentive will be announced at a later date.
You should check your eligibility under the new scheme before implementing. Be careful in particular for any public funded employee. Under the previous rules these employees were not eligible and although we await further guidance this is likely to be the same for the extended scheme. We will be updating our website with developments which can be found here.
Tom Wilson is Partner at Haysmacintyre. His clients are drawn primarily from the professional institutes and membership bodies (PIMBs) sector, including clubs and national trade associations. Tom has a specific knowledge of sports national governing bodies and prepares Haysmacintyre's annual NGB benchmarking report.