These building blocks are relatively straightforward and should feature as standard practice for most organisations. But if you have a major capital budget for a project, and the management of the costs and income associated with it when it is complete, you will need to give particular care to the creation of financial management arrangements. You will also need to consider how you will sustain any existing operation while managing a major capital project, and deal with any loss of income or impact due to building works.
Understanding the business model
The business model of any organisation or project is about how it generates the majority of income from its activities. For some asset development projects this may be straightforward -for example letting or hiring space to others. For others this may be more blurred. For example, providing a space where people with learning disabilities can make things to sell can bring in an additional income stream, although the majority of the income comes from contracts providing opportunities for people with learning difficulties to be usefully employed and learning new skills.
Understanding the business model is a particularly important part of business planning, for measuring the financial performance of activities and successfully securing finance for the capital to fund an asset development project.
Knowing the numbers
To be successful at securing finance it is essential that senior staff and members of a governing body of an organisation know and understand the headline figures for the capital and revenue requirements of a project and any of the assumptions associated with them. So you will need to know the overall operating costs and income associated with the project, as well as understand the assumptions on which they are based (rental/hire levels, inflation etc) and what level of income is required to meet all costs.
A key component of managing financial risk is to know exactly what the financial position of your organisation is in order that action can be taken to remedy any problems. This essentially means that you will need regular information showing the actual financial position (what has been invoiced/charged and what costs have been paid) against the planned performance (budget). It is important for this information to be up-to-date and timely so that action can be taken before it is too late - this is particularly the case where an organisation has no reserves. Deciding what represents "timely" means looking at the commitments of your organisation (particularly in relation to spending) and deciding how much time would be needed to allow you to implement action. For example reducing staff levels may take longer to implement than finding other cost reductions.
Full cost recovery
As the funding environment for voluntary and community organisation has changed towards project specific rather than organisational funding, there is a tendency for organisations to omit key areas of cost that are not directly related to project delivery from funding bids, contract tenders and commissioning bids.
This can erode levels of cash reserves/surpluses and squeeze areas of work (eg central administration, Human Resources, networking or strategic planning) that are important to long term sustainability of the organisation because they affect things like the quality of service or treatment of employees.
In the financial management and planning of organisations therefore it is important to apply full cost recovery to prevent this. Full cost recovery means:
"recovering or funding the full costs of a project or service. In addition to the costs directly associated with the project, such as staff and equipment, projects will also draw on the rest of the organisation. For example, adequate finance, human resources, management, and IT systems, are also integral components of any project or service ...The full cost of any project therefore includes an element of each type of overhead cost, which should be allocated on a comprehensive, robust, and defensible basis" (ACEVO 2009).