Scottish Government

4 GOVERNANCE

Financial controls and audit

Income

4.1 Like most voluntary organisations SDF faces the perennial difficulty of attempting to deliver long term strategic aims within a series of short term and uncertain funding arrangements. It has done so following a period of rapid growth where gross turnover more than doubled in a 3 year period (2001 and 2004) and rose over 1.5 times in just 2 years (between 2002 and 2004). This period of rapid growth has greatly influenced SDF's accounting and financial systems, making it a far more rigorous, transparent and accountable organisation in all finance matters. The Board receives more timely and user-friendly reports that enhance its ability to understand the organisation's financial position and consequently where the main financial challenges facing the organisation may lie.

4.2 As Figure 2 shows, the rapid growth in income did not continue during the review period. Nonetheless, SDF did benefit from a real terms increase in funding. Total income was £4.9 million ⁴ for the 4 years to end 2007/08, £5.1 million in 2007/08 prices. This represents a 9.5% increase in total income between 2004/05 and 2007/08 or 1.5% if general inflation is excluded.

Figure 2. SDF Income 04 - 08
Income has risen slightly in real terms between 2004/05 and 2007/08

Source: SDF Annual Accounts

4.3 SDF's dependence on the Scottish Government for funding can be seen from Figure 3. In 2004/05 it contributed around 40% of all SDF income, £479k out of a total £1.13 million. By 2007/08 this had increased to almost 45%, £548k out of a total of £1.24 million.

Figure 3. SDF Sources of Income
The Scottish Government is the biggest single source of income for SDF

Source: SDF Annual Accounts

4.4 The growing importance of non-core Scottish Government income in this total is also worth assessing.

Figure 4. Split of Core and Non-Core Income
More of SDF's core costs are being met from non-core income

4.5 Income from the Scottish Government that contributes to SDF's core costs rose by only 1% between 2004/05 and 2007/08, from £402k to £408k. Excluding inflation, this represents a 6% fall over the review period and highlights the growing importance of non-core income from the Scottish Government to fund SDF's activities. In 2004-05 non-core income amounted to £77k and by 2007-08 this had risen 1.8 times to £141k.

4.6 Membership fees amounted to a total of £60k over the 4 year review period, or £15k per annum.

Costs

4.7 Over the same period the organisation's cost base has risen 2.7%, from £1.18 million in 2004/05 to around £1.22 million in 2007/08 ( see Figure 5). Excluding general inflation, the organisation has delivered a 4.8% real fall in its total costs over the same period.

Figure 5. SDF's costs 2004-08
SDF's costs have risen slightly over 2004-08. Staff costs have dropped.

Source: SDF Annual Accounts

4.8 Staff costs have accounted for between two thirds and three quarters of all SDF costs, amounting to £756k in 2007/08 ( see Figure 5). These costs have fallen by 7% over the period, or by 16% once the effects of general inflation are removed. This trend may suggest the new pay and grading system introduced in 2007 has been of assistance in keeping staff costs under tight control. Staff costs reached a high point of £822k in 2005/06 (£870k in 2007/08 prices).

Risk management

4.9 The organisation does not have a formal risk register. However, it has undertaken a risk exercise within the last 3 years, reviewing all main organisational risks. This highlighted that SDF's HR processes were inadequate and left the organisation open to potential financial risks. The short term nature of SDF's funding and the low level of reserves it had accrued, meant SDF needed to be sure all HR processes were fit-for-purpose. Much of its funding no longer included an automatic uplift to cover wage increases but the pay-award system that was operating at the time meant SDF was carrying an unsustainable wage bill. As a consequence of this risk exercise SDF introduced a new HR system. It now has an appropriately qualified individual with responsibility for this area of the business and, at the time of its introduction, the new system was IiP accredited. Cost considerations (i.e., an annual subscription charge of circa £3,000) means SDF has let the IiP accreditation lapse.

4.10 The organisation is again looking to assess its key risks in the coming months ( see below on key risks facing the organisation).

Short and long term planning processes

Budgets

4.11 Budgets are prepared annually, being assembled by the Finance Manager in the first instance on a 'zero-based' budgeting basis, i.e. no revenues are assumed to be guaranteed and therefore the budget aims to include only those revenue streams that have been formally approved and so are guaranteed to be paid. This more prudent approach to budgeting was introduced following funding shortfalls in the years prior to the review period; costs were being expended without incomes being adequately secured.

4.12 The annual budget is presented to and approved by the Finance and General Purposes ( F&GP) Committee. The F&GP members are provided with a detailed income and expenditure statement accompanied by a detailed narrative. This narrative helps the recipients understand the key assumptions used to develop the budget and makes the sign-off process transparent and easier for non-accountants to fully understand. Management accounts are presented to each F&GP Committee and variances are presented and discussed. The minutes of the F&GP Committee are presented to the Board covering all financial matters. The Treasurer and the Finance Manager attend the Board to answer questions in advance of the Board approving the annual budget.

Core/Non-core costs

4.13 Core costs cover the following cost items:

• Staff costs for the Director, Head of Policy, Head of Information & Communications (I&C), an I&C Officer & Junior Officer (part-time), Head of Business Administration, an HR Officer plus 3 Admin Assistants
• Training costs
• Travel costs
• Subscriptions
• Insurance costs
• Professional Fees
• Glasgow property costs
• Post & telephony costs
• Office & computer supplies

4.14 SDF's total core costs cover national as well as regional activities (i.e. covering activities in the North, the East and the West) and in total amounted to just over £590k in 2007/08 ( see Table 1). However, core costs classed as national by SDF were £31k more than the core income it received from the Scottish Government in 2007/08. Indeed, for all 4 review years, SDF recorded a deficit in its funding from the Scottish Government for these costs. Including SDF's Regional core costs and incomes has helped reduce the overall deficit position to just under £20k in 2007/08.

Table 1: SDF Core costs and revenues

Core income does not cover core costs

4.15 Assuming the organisation follows a similar pattern of budgeting in the future, the deficit position on its national Scottish Government funded core activities would suggest it will become even more dependent on non-core funding to support core activities. Although some core costs could be eliminated, there will be a minimum cost base that will have to be funded irrespective of what income is generated.

4.16 Non-core or project based activities have helped fund a percentage of SDF's core management & admin costs, travel costs, property costs (rent, rates & insurance), post & telephony, office supplies and professional fees. This type of arrangement not only helps SDF fund its core costs but also offers a cost-effective means of delivering one-off or short-term projects. Instead of having to fund a separate organisation that has to fund the full cost of, for example, an office and all the associated on-costs, project sponsors need only provide sufficient resources to cover a charge that is equivalent to the marginal cost of being co-located with SDF core activities.

4.17 The original grant submission to the Scottish Government for the period 2004-08 made no mention of project income as likely revenue source. The target allocation SDF now seeks to raise from each non-core project is anywhere between 7.5% and 15% depending on what the individual project budget can carry.

Financial safeguards

4.18 The Treasurer is a counter-signatory to all cheques and sees most (if not all) purchase orders. Given the demise of cheques and the rise of internet banking this internal check on funds flowing out of the organisation is effectively lost. The payroll system, for example, operates through internet banking. To counter what may appear to be a more risky operation, the organisation makes use of more external audit checks to reassure the likelihood of fraud remains low.

4.19 The Treasurer provides a challenge function to the Finance Manager whilst also offering guidance in the non-executive director role. The Treasurer has seen a marked improvement in the quality of financial management and feels the organisation is now far more professional and transparent in its management of financial affairs. This relationship has been a powerful one for the organisation but the Board perhaps needs to discuss the long term implications of this arrangement.

Planning and consultation with members

4.20 The organisation has a formal corporate planning process that seeks to involve not only internal management but also the wider membership, its funders and stakeholders. The Board is key in setting the plan and determines what the longer term objectives and aims should focus on through an understanding of the views and wishes of its members and what the Scottish Government is looking to implement over the plan period. The Board sets the 3 year plan, which in turn is the basis for SDF's submission to the Scottish Government for core funding for the plan period.

4.21 The strategic plan sets out agreed aims which are reflected in outputs and associated targets. It also states a series of 'key strategic objectives'. These are not explicitly linked to outputs and targets. This break in the 'golden thread ⁵' may reduce the likelihood of making progress on them.

4.22 Intelligence is developed via the use of focus groups and stakeholder meetings. Email is used to enable wider consultation and the consultation process is furthered through discussion and debate that happens at various SDF-run conferences, formal training sessions and user involvement groups.

4.23 There is inevitably a wide variation of views on some issues and SDF seeks to take forward the consensus view. Where consensus does not exist SDF seeks to inform those with views at variance, to ensure an informed and mature position is arrived at. Discussion relating to harm reduction was an example given that highlighted how SDF deals with more extreme views. Those seeking to argue against the consensus position were brought round through education and information.

4.24 The organisation believes it has very good links with senior civil servants across a range of Divisions. Such links are seen as being extremely important, affording SDF a route to influencing policy and providing the organisation with a strong steer as to where future Scottish Government funding is likely to be targeted.

Monitoring performance

4.25 The Board receives regular updates on activity via the Director's Report. This does not track performance against the strategic plan. Monitoring reports are sent to all relevant funders to show performance against targets. However, the Board is not asked to review such reports in advance. As a consequence, it is not clear how the Board formally reviews performance against targets either annually, or at the time when individual and core funding arrangements are being re-assessed.

Accountability to membership processes

F&GP Committee and Board

4.26 The current Board (Management Committee) is 15 strong with a Chair, Vice-Chair and Treasurer. The Memorandum and Articles of Association requires that the Board should comprise no more than 18 and no fewer than 12 members. The quorum for the Board is set at 7 with a majority voting system in operation. The Board can establish sub-committees as it sees fit and pass on matters more appropriately dealt with at sub-committee level. The Finance & General Purposes Committee ( F&GP) is such a sub-committee which reviews and decides primarily on finance and HR matters.

4.27 The F&GP Committee comprises 6 members from the Board. Practice has it that all Board members are eligible to sit on the F&GP Committee but a membership of 6 is thought adequate for effective decision-making. It is also thought necessary to have suitably qualified members sitting on the Committee i.e. having relevant finance and HR knowledge. Currently, the Chair and the Treasurer provide the relevant finance and HR expertise alongside their general challenge function to the Director and the executive.

4.28 There are no formally documented standing orders for the F&GP Committee although the Board has set the F&GP quorum to be 3. It is not clear should the two key members be absent, whether the Board would deem any business concluded to be wholly competent ( see below for discussions on risks). Having said that, the Board and F&GP Committee have operated effectively for some considerable time and there is no evidence of inappropriate decision-making having taken place.

Board composition and succession planning

4.29 Over the review period SDF's Board has comprised 28 different members. Seven, i.e. 25%, have been long term members and have been on the Board for the full term of the review period. The posts of Chair and Treasurer have been held by the same member for each of the 5 review years. There have been 3 holders of the Vice-Chair post. There have been only 7 separate members of the F&GP Committee in this time, with the Chair and Vice Chair of the Board consistent members. Between 2004/05 and 2007/08, the F&GP Committee membership did not change, with the same 6 members holding their positions on the Committee. The Director has been in post for the full term of the review period.

4.30 Stakeholder views of the Board members are practically all positive. The high degree of continuity in the key posts of Chair, Treasurer and Director brings with it significant benefits where access to networks, formal and informal, extensive knowledge of the sector and good links with key funders are critical to SDF's financial security and its ability to deliver on objectives. However, whilst continuity is beneficial, effective succession planning is critical to minimise the downside of any key personnel leaving without sufficient warning. It is also important that the organisation has sufficient external challenge to ensure its views and ideas remain fit-for-purpose.

HR systems and processes

4.31 The F&GP Committee approved a move away from the Scottish Joint Council ( SJC) system of pay and grading in 2007 to ensure SDF was able to recruit and retain suitably qualified personnel, but to do so within the limitations of its funding arrangements. Much of SDF's funding does not automatically include an uplift to cover in-full all pay awards and pay increases. As highlighted above, the organisation was facing severe financial pressures early in the review period but still had to pay substantial pay awards under the SJC system.

4.32 The new pay and grading system was devised with assistance of external consultants. It involved regrading all jobs and placing individuals in an appropriate job grade. Benchmarking was also undertaken using small (albeit in the main at the larger end) voluntary organisations akin to that of SDF to help set the appropriate salary bands.

4.33 The new system gives the organisation greater flexibility when setting pay awards whilst also giving the staff greater certainty, as they no longer need to wait until the Scottish-wide SJC rates are negotiated and agreed. It is felt the system now ensures SDF compares favourably with the sector. Any pay system needs to be sufficiently flexible to ensure good staff are retained, ensure mobility for those who are effectively developing for the good of the organisation whilst not being overly generous and so acting as a block to people moving on when appropriate.

Conclusions and recommendations

Sources of funding

4.34 SDF has a high reliance on the Scottish Government for funding, both for core activities as well as on a project basis. There was no evidence that such a financial position is inappropriately influencing SDF's views. However, the Board may wish to consider if, as funding gets harder to secure, such reliance has the potential to undermine SDF's long-held role as the impartial voice of the sector.

Core funding

4.35 The Scottish Government's core funding does not cover all that SDF classifies as core activities. The shortfall is made up of contributions that come from other projects the organisation is successful in securing. This is not an uncommon approach to funding in the voluntary sector. However, as budgets get tighter and competition for scarce funds grows, SDF needs to be aware that such project contributions may be harder to secure. Each lost project means the contribution required from the remaining non-core activities will rise, potentially undermining their individual viability. The current financial and budget controls have been structured in the light of this potential downside. Securing funding from as wide a source as possible is a key task across SDF. However, as the organisation plans for the next 3 years, it will need to ensure that chasing necessary funding does not undermine the organisation's ability to deliver what its membership expects, a challenge facing most voluntary organisations dependent on statutory bodies for their funds.

4.36 It is perhaps now more than ever essential that the Board has an agreed view on SDF's core activities. This will give it a better understanding of its actual core costs and therefore what level of on-going funding SDF requires to deliver its planned objectives without over reliance on project funds and/or on scarce cash reserves.

Internal audit

4.37 There is no formal internal audit function. The current Treasurer's finance background ensures the finance function is challenged on key areas, e.g. major purchases, financial controls etc. However, should the current Treasurer leave, a suitably qualified replacement would be required. This places a major responsibility on a non-remunerated part-time Board member and suggests there is a need for some contingency planning in the interim.

F&GP Committee and Board arrangements

4.38 The F&GP Committee undertakes significant decision-making on behalf of the Board. In particular, it approves the annual pay awards. The Board can comment on such decisions but members are not asked to vote. Whilst having a suitably qualified and tightly managed Committee can mean more efficient decision-making, it is the Board which is ultimately responsible for the actions and decisions of the F&GP Committee. Individual Board members have collective financial responsibility. If the current Chair and Treasurer were not present, would the Committee have the skills that justify the finance and HR issues being passed to it from the Board?

4.39 There is no indication that the current arrangements are not sensible and adequate for effective and safe decision-making. However, the Board may wish to consider whether it needs to regularise the current arrangements for the future operation of the F&GP Committee. Given the importance of both finance and HR issues to the sustainability and effective performance of the organisation, the Board may wish to assess the current arrangement whereby more of the details on these areas currently reside with F&GP Committee members.

Board monitoring arrangements

4.40 The Board is provided with updates on activity at each meeting. It does not formally approve any performance reviews submitted by the organisation to its funders. Where specific issues arise, these are highlighted at an F&GP Committee meeting.

4.41 A key function of the Board is to ensure the organisation is delivering to its objectives. It is not clear how the current arrangements ensure the Board is suitably involved in this key role. Without formally reviewing the outputs and outcomes of the organisation, the Board may well struggle to determine which areas are having greatest impact, which parts of the organisation may be struggling and/or out-performing or where performance may leave some funding streams more vulnerable, should they be subject to review.

4.42 It is also not clear how they can effectively monitor the executive team's collective performance in delivering to pre-set output targets. As a consequence, the Board may wish to consider how best to establish a formal review process for assessing SDF's future performance. This is dealt with further in Section 5, below.

Succession planning

4.43 With no formal succession planning the organisation is dependent on the Chair, the Treasurer, the Director and key staff remaining in post. The Board may wish to consider if there is a real risk of all long term post holders leaving at the same time or in close succession, thus leaving the organisation vulnerable at a time when funding constraints may limit possible solutions.

Recommendations

R1 The Board needs to establish an agreed view on SDF's core activities, to give it a better understanding of its actual core costs and what level of on-going funding SDF requires to deliver its planned objectives (without over reliance on project funds and/or on scarce cash reserves).

R2 As part of its planned assessment of key risks facing the organisation, SDF should consider:

• if, as funding gets harder to secure, reliance on Scottish Government funding has the potential to undermine SDF's long-held role as the impartial voice of the sector
• succession planning in relation to key staff and Board positions and contingency planning in the event of a number of people leaving these positions around the same time
• the current arrangement whereby significant decision-making powers and detailed knowledge on finance and HR issues currently reside with Finance and General Purpose Committee members.