St Mungos Broadway Financial Strategy

Introduction
In April the Board of St Mungos Broadway agreed the following objectives for the new
organisation:

Service Excellence: high quality, safe and effective services

Growth: more services for a greater number of clients in more areas
Financial Strength: overcoming challenging funding environments and securing the
charity's future
Profile and Influence: a strong reputation and an independent voice
People Management and Organisational Development: supporting talent and
developing a positive internal culture

Alongside these objectives the Board requested a financial strategy for the next two years
which would ensure that we remain financially strong and independent for the foreseeable
future while meeting our aim of maintaining and developing our services and protecting jobs
throughout the organisation. This was presented to the Board in early 2014 and this strategy
includes updated calculations based on a greater understanding of the position following
integration activity.

Given the range of downward pressures on our budgets over this period, it was anticipated
we would need to find up to 2m recurring revenue savings over each of the next two years
to ensure we meet the objectives outlined above.

The use of reserves to underwrite revenue savings was not sanctioned by the Board. Our
reserves policy states that we should have at least 25% of our turnover (less our rental
income) in accessible reserves. This equates to around 11m. Our regulators (HCA and
Charity Commission) expect organisations to have a realistic reserves policy that is
appropriate for the organisation.

While 11m may sound a lot of money, it is not when we consider that we need reserves to
invest in developing our services and buildings, bid for and establish new services, manage
any emergencies which come along and hold us in good stead to face the economic
challenges ahead.

As of September our cash reserves stood at 6.8m, which includes 3.8m of designated
reserves put aside to maintain our buildings. This is a reduction of where our reserves have
been and of course, less than the 11m we need to hold to be in accordance with our own
policy.

Whilst in the short term this is not a problem, and has been anticipated, we have reached a
stage where it will become one if we do not take action and seek to build up our cash
reserves.

St Mungos Broadway has assets, mainly buildings that we own. However these are not
easily realised and turned into cash. We use our buildings to provide services and, from a
financial point of view, they give us a significant and profitable part of our annual income.
The rents from our properties underpin our service provision. Selling property to build up
cash reserves without having a wider strategy would just be a stopgap measure to which we
would inevitably return when our reserves fall again.

Therefore, our overall strategy sets out that to manage our finances we need to reduce
and manage our expenditure while increasing our income. This would spread our
management and other running costs more widely while ensuring our finances are tightly
managed with a focus on obtaining value for money.

Context

There are a number of factors which, although difficult to quantify, demonstrate there will be
growing pressure on our finances:

External pressures
The growing numbers of homeless and vulnerably housed people who will need our
services.
Reductions in public sector expenditure, especially from local authorities who
commission us to deliver many services and who will be implementing further
significant cuts over the coming three years. There is no guarantee that local
authorities wont try to renegotiate their existing contracts to respond to these
pressures. A recent stakeholder review we commissioned identified that our
commissioners would be looking for up to 30% reductions in their grant funding over
the next three years.
The clear requirement on Central Government to reduce expenditure, especially in
relation to Housing Benefit where we are already seeing pressure being put on the
rent levels we are able to charge.
Increasing competition for fundraising income, both across the voluntary sector and
within homelessness.
Increasing pressure from the Regulator to maintain our housing stock to a decent
standard at a time when the grant available to assist in this has reduced radically.
The new Housing Minister said only last week that he wants to get to a position of no
grant for housing providers. This leaves us with little choice but to use our designated
reserves and run capital fundraising appeals for this purpose.
Increased competition in tendering processes and the requirement to provide added
value for new and existing contracts; which means services largely paid for from
unrestricted fundraised income. Using fundraised income to support the loss of
contract income as an alternative would mean a reduction in funding to added value
areas such as Recovery College, Skills and Work, Health.

Internal Pressures
Increasing costs of running our services. In St Mungos, support income went up by
2.5% last year but the cost of delivery of those services increased by 5.9% leading to
a 1.7m deficit in housing related support services (up 620k from the previous
year). This deficit was met from a surplus on rental income. A reducing operating
surplus - 468k last year which was less than half of the previous years 993k and
the year before 3,242k.
The need to invest in a range of systems to support the organisation e.g. IT, HR.
Increased staffing costs due to factors such as annual increases and increments,
pension auto-enrolment and national insurance.
The revaluation of our pension deficit in the Social Housing Pension Scheme
(SHPS), which we expect to lead to us having to pay increased deficit payments in
excess of the 960k we currently pay each year.

The Strategy

Managing Expenditure
There are a range of revenue areas where we can and will make savings over the coming
two years:
Staff costs are our most significant expenditure. Put starkly, either fewer staff must be
employed or the overall staff cost must be reduced. Otherwise, savings cannot be achieved.
We will address this in two ways:
Savings in posts, mainly at a senior level or through merging support functions e.g. in
HR and improving our systems such as in IT. We have identified 20 posts where we
either have or will make savings as a result of the merger, out of a staff complement
of 1300+. None of these posts are in direct service provision.
o Savings on staff spend which, as we will be maintaining all existing
members of staff pay, terms and conditions, will need to be realised by
establishing new pay rates for new staff.
Housing management costs - targeted work covering issues such as reducing voids
by two percentage points and reducing rent arrears.
Making savings on other operational costs e.g. licenses, insurance and procurement
spend.
Reducing our expenditure on agency staff.

The savings we are able to make will grow each year and by year three should be at least
2.1m

000
Reduction of posts (20) 800k
New staff rates of pay to median based on 3
420k
years (position after 4 years is 500k)
Bad debts and voids 1% 2% improvement on
400k
voids & 70k reduction in bad debts
Other operating costs (representing a saving of
450k
1.5% of 30m of operation costs)
TOTAL SAVINGS by year 3 2,070k

Increasing income growth

Savings are only part of the overall picture. Alongside this we will need growth coming from
providing new services, and developing our social enterprises and fundraising. In part this
will be needed to counteract the impact of reduced funding from commissioners, a factor
which continues to put financial pressure on most service providers to local authorities.

Both St Mungos and Broadway saw successful growth in services over the past few years.

Growth falls into three main areas: service growth, growth from our social enterprises, and
growth in fundraising.

a. Service growth - Service growth falls into a number of component areas:

Contracts for services: As has been discussed, existing contracts will come under
pressure this year. However, so will many other contracts of other agencies in our
sector. Given both organisations track record in winning new services (e.g.
NSNO, SIB, Islington services) it is reasonable to assume an increased income in
relation to services of 3m for each of the next three years, contributing 300k
net to the running of the organisation.
Rents: Our intention, as set out in our reserves strategy, assumes developing
and acquiring new properties and assets and therefore achieving growth in bed
numbers with the contribution to surplus that can be achieved on housing
management activity.
 Other client support services: While Supporting People (SP) contract funding has
been significantly reduced, there has been notable growth in other services such
as advice, work and learning, welfare rights and health and homelessness.
Growth of 1m over three years in areas not funded by SP contracts is assumed.
b. Enterprises - The new organisation will continue to have enterprises operating in the
areas of private rented sector, health, HR consultancy and systems consultancy.
Real Lettings is by far the most significant of these with the Property Fund now
standing at 38m with further investment likely. Through this there is opportunity to
improve the contribution generated. Over the past two years Real Lettings has
generated a contribution to the charity of over 150k and the business plan sets out
the potential to increase this.
c. Fundraising - The current fundraising strategy for St Mungos Broadway anticipates
growth in fundraised income which will generate an increase in net fundraised
income of around 250k next year. This is a sensible level of growth at the mid point
of the fundraising strategy. However, the majority of fundraised income is raised from
scratch during the year, with the highest volume of activity happening at Christmas.
This can make it difficult for us to ascertain whether income will be in line with our
targets until late in the financial year.

Conclusion

As long as we take the necessary action St Mungos Broadway will be in a good financial
state. We have significant assets but have reached a point where we need to build up our
cash reserves. In short we are asset rich and cash poor. If we do not take action now we
risk a more serious situation in the future which could threaten the much needed services we
currently provide.