COVID 19 and our response to it has brought about massive changes in so many ways. The lockdown has directly affected the way we work, and the activities we are carrying out. Some organisations have had to close down part or all of their operations, while others have ramped up or redirected their efforts.
It is a good idea right now to re-look at the financial plans of your organisation.
The annual budget for an organisation and/or for a particular project may have been approved by the board and by funders before COVID 19. The following may be reasons for significant variances from the original approved budget, as a direct financial impact of COVID 19:
- Certain activities may not take place at all, such as physical events or travel, and therefore the related direct costs will be lower.
- Previously unplanned new activities will result in additional related direct costs.
- Reduced funding may mean that expenditure will also reduce accordingly.
- Increased funding, on the other hand, may mean an increase in activities and increased related expenditure.
- Increase in activities, albeit for different or similar activities, may result in additional expenditure.
- It may, for example, be that additional equipment, connectivity, applications and data, are needed if employees are working remotely or activities will be carried out differently.
- Unplanned expenditure on, for example, upgrading information systems and technology, as well as training and support costs in the effective use of these, may be necessary.
- There may be costs related to changing policies and procedures, for example, subscriptions to electronic contract management.
- Relief measures from government may be accessed and received, for example, a reduction in salaries due to the utilisation of TERS.
So there are many reasons why we recommend that budgets and cash flow forecasts are revisited at this time. Here are some points to be bear in mind:
- Budgets must “balance”; that is all planned expenditure for the period still needs be funded either from income in the same period or from balances carried forward from a previous period. Remember that this is not only in total, but also project by project considering any funding restrictions.
- Consider whether the budget should be changed or whether you should plan to report a variance based on the changed circumstances. Be careful of increased expenditure outside of the approved budget.
- Be cautious of planning to spend from savings and reserves (using carried forward balances).
- Carefully consider not only the current needs and demands but also the needs in the future.
- Communicate the anticipated changes and the financial impact to all relevant stakeholders, such as board members, funders, employees, and beneficiaries.
- Timing of receipts of funding and the commitments to pay for expenditure may also change, and therefore it is important also extend financial planning to include cash flow forecasting, considering the flow of cash in and out of the organisation on a month by month basis. One difference between the cash flow forecasting and budgeting is that cash flow forecasts needs to include VAT on receipts and payments, as well as the VAT refund or payment to SARS, whereas annual budgets for the organisation or a project budget for a registered VAT vendor will include income and expenditure net of VAT (as the VAT is paid over or recovered from SARS).
- It is the responsibility of the leaders of organisation to consider the impact of changes on the organisation in terms of stakeholders (including employees and funders), activities, and finances. We therefore urge board members and senior executives of organisations to take time for careful financial planning in this time of significant change.
Need a bit of help? CMDS can assist you with financial planning for your organisation.