April 25, 2024
Finance

Financial forecasting and the going concern assessment


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The economic landscape for arts and culture organisations continues to be challenging. Many local councils are considering or are already implementing cuts to their funding, with devastating news in recent weeks as several councils have announced proposals to cut their entire cultural budget.

We are still recovering from the impact of the pandemic, and the challenging economic climate is also putting pressure on visitor and attendance numbers, as well as philanthropic donations.

Organisations who are part of Arts Council England’s National Portfolio have likely been reassured by the recent extension of their funding until 2027, however for charities who had hoped to join the Portfolio, this chance has been delayed by a year.

Financial stability

In my role as auditor and adviser to the sector, I am finding more and more trustee boards becoming involved in the detailed strategic planning for their organisations.

A consequence of this is that many boards are becoming increasingly financially literate.

Budgets, cash flow forecasts and the going concern assessment are important agenda items which should be appropriately deliberated and discussed, and I am frequently asked questions by boards to ensure that they are meeting their obligations.

Assessing going concern

An entity is a going concern unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. All available information about the future must be taken into account when assessing going concern, and “the future” is at least 12 months from the date of authorising the financial statements.

Going concern is officially reviewed by trustees at the time of approving the accounts and is sometimes treated separately from the normal forecasting process. This may be appropriate for charities who have very healthy unrestricted cash and reserve levels, where it is straightforward to prove that the charity is not facing insolvency.

However, for organisations who operate with low levels of reserves and considerable uncertainty over future funding, it is much more appropriate to refresh budgets and cash flow forecasts at the same time as completing the going concern assessment.

I advise charities who are not already doing so to consider extending their budgets and cash flow forecasts from the traditional one year in advance, to at least three, if not five years. Although it can be difficult to predict income levels in later years, it is helpful in ensuring that longer-term projects, such as building repairs and maintenance, are appropriately planned.

Gaining comfort

It is imperative that trustees feel comfortable that the going concern conclusion, which is often based primarily on information provided to them by management, is appropriate. I’ve set out below some key things I recommend trustees consider when reviewing budgets and forecasts, both as part of the going concern assessment and throughout the year.

  • Ensure you understand the assumptions and how reliable these are: for example, inflation, staff numbers and attendance numbers. Ensure each is stress-tested.
  • Consider the predictability and certainty of income items. Split the income into categories of decreasing certainty and consider the impact if less certain items are not received.
  • Creative sector tax reliefs provide a very welcome boost to cash levels; however, they cannot be received until they are approved by HMRC. This can take some time, so consider the impact that any delays in receipt may have on your forecasts.
  • Ensure your budgets cover both restricted and unrestricted funds, as well as capital expenditure. Cash flow forecasts should also separately identify restricted cash.
  • Consider how accurate your previous budgets have been.
  • Compare your budgeted reserves with your reserves policy and consider whether your reserves policy remains appropriate.
  • And finally, don’t presume that the information is correct without checking. Forecasts are almost always prepared on Excel rather than automatically generated from the finance system, so ensure that links to other data are up to date, and that formulae is correct.

None of us can predict the future and circumstances may change swiftly, however by ensuring that you are armed with as much information as possible and reforecasting on a regular basis, you will give yourself the best chance to act appropriately if a financial crisis occurs.

Jane Askew is a partner and head of arts and culture at haysmacintyre  

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