What exactly is financial resilience? Well, it has been defined as “the ability to access and draw on internal capabilities and appropriate, acceptable and accessible external resources and supports in times of financial adversity”.¹
There are many factors that can cause financial adversity, including (but not limited to) global pandemic-induced Government shutdowns. Regardless of the cause, if your organisation faces financial adversity or even potential adversity, it will need financial resilience to come out the other side alive and well.
Here are three key areas that can build financial resilience in your organisation.
1. Financial Resources
The first area that comes to mind is, of course, financial resources. Having liquid financial resources such as cash reserves, will significantly support your organisation in times of financial adversity.
Readily available cash reserves can allow your organisation to weather the storm of financial adversity. For example, if your organisation is unable to operate and generate revenue for two weeks, cash reserves will allow you to continue to pay staff wages and operational expenses such as rent and utilities.
The question is, what level of cash reserves are required? Simply put, this will be different for every organisation depending on the nature of their business model and risk appetite. As a general rule of thumb, an amount equivalent to three months (or more) of expenses is recommended².
Cash reserves are important for financial sustainability but are not always leveraged by not for profits. To see how this is impacting our sector, check out our article on the AICD’s 2020 Not for profit Governance and Performance Study.
Organisations are run by people, and in times of financial adversity, having the right financially-minded personnel is key to survival.
First and foremost, you need to ensure that there are multiple people within the organisation that understand the business model and corresponding financial model. Knowing how the organisation generates cash flow, coupled with a solid understanding of its financial position, will greatly assist in scoping out the potential impacts of the situation at hand. These skills will also come in handy when exploring the options available to minimise loss, and will enhance the decision-making process.
In times of financial adversity, you may need to make decisions around which activities to continue, and which activities to stop or pause. Key personnel should clearly understand both the financial impact and the social impact of these decisions.
Want to start upskilling your team? CBB provides free articles full of practical tips and tricks to help your decision-makers brush up on their financial acumen.
3. Financial Systems
Having the right financial systems in place before any financial adversity occurs will allow you to navigate challenges with far greater ease. Financial systems such as good cloud-based accounting software such as Xero, a well-structured chart of accounts, and the timely reconciliation of accounts is essential.
Additionally, systems and processes such as regular reporting and reviewing of financial results will keep key personnel and board members aware of the organisation’s financials. Practising this will place your leadership in a far better position to successfully navigate financial adversity.
These financial systems, in combination with the right people, provide a clear understanding of the organisation’s performance and position before any adversity occurs. As financial adversity occurs (or potentially unfolds), access to up to date information will facilitate effective decision making.