Presented Tuesday 14 November at the NCVO/BWB Trustee Conference 2017

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HOW TO ASK DIFFICULT
QUESTIONS ABOUT YOUR
CHARITY’S FINANCES
SPEAKER
JIM CLIFFORD OBE
PARTNER, HEAD OF ADVISORY AND
IMPACT, BATES WELLS BRAITHWAITE

2. 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 j.clifford@bwbllp.com

3. 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

4. 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?

5. Session 1 – Reviewing accounts
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

6. Session 1 – Reviewing accounts
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?

7. Session 1 – Exercise 1
5 /
Reviewing accounts: applying the fundamental principles…
Exercise 1

8. 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.

9. Session 2 – Structuring your enquiries
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

10. Session 2 – Structuring your enquiries
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

11. Session 2 – Structuring your enquiries
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

12. Session 2 – Structuring your enquiries
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.

13. 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?

14. Session 3 – Challenging your budget
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.

15. Session 3 – Challenging your budget
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!

16. Session 3 – Exercise
14 /
Reviewing a budget
Exercise 3

17. 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?

18. 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?

19. 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)?

20. Bates Wells & Braithwaite London LLP
10 Queen Street Place
London EC4R 1BE
www.bwbllp.com
Tel: +44 (0) 20 7551 7777