How to stress-test your business plan and improve your sustainability

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Carolyn Sims, Director of Lending at Charity Bank, outlines six key elements which charities and social enterprises wanting to stress-test their business plan and improve their sustainability at a time of uncertainty may wish to consider.

As you look over your financial plans and resources, are you convinced they will help your organisation withstand extra costs or unforeseen challenges?

Having seen a diverse range of organisations with varied business plans there are six areas, which stand out for me when it comes to financial planning. I believe these are the junctures at which organisations will either succeed or fail in the face of challenges.

1. Realistic financial projections

The best financial planners will always give priority to pragmatism over passion. They will assess their projections dispassionately, erring on the side of caution when considering expected income, expenditure and forecasting increases in activity. Any expectations for an increase in income will have a solid basis.

To fine-tune their projections, some people like to prepare best, difficult and worst-case scenarios to test how vulnerable their organisation might be under different circumstances. This often includes a detailed explanation of the assumptions used. They’ll come up with a note of possible actions which would help resolve the challenges of worst-case scenarios. (see some examples in point 6).

2. A board with the skills to navigate a changing funding climate

A skills audit is a useful way to make sure the board can steer an organisation down the best course. Organisations that are willing to identify skills gaps and recruit additional trustees as appropriate often find they can pivot and improve their plans for sustainability. Some organisations opt to train their boards in financial planning. There are pro-bono offers of professional support from organisations like The Cranfield Trust and the Impetus Trust, which helps with managing finances and utilising loans and social investment.

3. Access to additional funds for growth

Organisations expanding their activities or embarking on new projects often need access to additional cash to support day-to-day operations. Considering this at the beginning of a new project is key to success. Good plans give careful attention to what level of resources will be needed to fund normal activities as well as the new project. Some organisations will create access to additional funds through an overdraft or by taking out a loan to provide working capital. Another option is to set aside savings, which can be spent accordingly.

4. Emergency funds for unexpected project costs

Putting aside emergency funds is essential to managing the risks involved in a project. Contingencies limit the adverse impact, but it is imperative to consider whether they are enough. Organisations with robust plans will have identified the risks involved, for example increases in costs of materials, unexpected ground conditions, the effect of bad weather or delay in the receipt of a grant and hold an appropriate level of reserves to be used in case of emergency.

5. Making a habit of identifying risks

People have different views on risk-taking and growth, and scarce time and resources can tempt some to take short-cuts, but time spent planning is seldom wasted. In my experience, planning and identifying possible risks involved in a project helps the most resilient organisations to come up with mitigating actions which reduce those risks and steer them away from obstacles.

6. Fine-tuning & stress-testing

Perhaps the best method for testing a business plan to make sure it remains viable and robust in adverse circumstances is to question the detail. If you can provide strong answers to difficult questions you know your plans are robust, if you can’t it’s a good pointer towards what you need to focus on to improve:

  • Can I show why the organisation’s plans are viable?
  • How detailed is my knowledge of how the plans will be implemented – are there any gaps?
  • What are the hidden barriers to implementation?
  • How will we overcome those barriers?
  • Do we have the skills as an organisation needed to deliver and overcome challenges?
  • Is the organisation’s team learning continuously about best practice and drawing on the experience of others?
  • Are the assumptions we have made soundly based on evidence and on experience (whether our own or those of others)?
  • Have we stress tested our plans against unexpected events and do we have actions for best, difficult and worst-case scenarios?

Example stress testing for property acquisition

Here are a few scenarios you could consider in the context of planning for property acquisition:

  • Are there adequate finances available for a project, which is delayed by six months or one which incurs costs 10% higher than budgeted?
  • If loan finance is a part of funding what happens if interest rates rise by 2%?
  • In the case of a building set to be let as affordable housing:
    • What happens if occupancy is only 90%, rather than 95%?
    • How might you respond to the possible loss of housing benefit to those that are unemployed?

The above does not constitute advice or a recommendation.

Charity Bank is an ethical bank owned by and dedicated to supporting charities and social purpose organisations. Charity Bank lends to charities and social enterprises. To find out more visit www.charitybank.org, email: enquiries@charitybank.org or call: 01732 441919.