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Financial forecasting
Campbell Tickell’s experts present 12 top tips for sound financial planning
FINANCE
Helen Routledge
Director, Campbell Tickell
Helen Routledge
Director, Campbell Tickell
Issue 75| December 2024
The vast majority of registered providers are currently in the window between 30 June’s deadline for submission of their financial forecast return (FFR) and the start of preparation for next year’s return. It therefore seems like the perfect time to reflect on what went well with this year’s FFR – a survey of financial information required by the regulator – and what could be improved on for next year.
Campbell Tickell gathered business planning specialists Helen Routledge and Sue Harvey, both directors, and senior associates Eddie Magowan, Mark Reid, Phil Newsam, Dave Roberts and Roger Maddams, to discuss what messages, lessons and tips they would like to share with our readers. This article summarises the discussion.
1. Establish accountability
Our top three tips regarding accountability are:
- Establish clear accountability for returns with a member of the executive team.
- Produce internal guidance notes setting out sources, calculations, timetables, responsibilities and lessons learned.
- Include in the timetable a clear period, prior to submission, for careful quality control by someone who has not been involved in the data collation.
3. Pre-empt the regulator’s questions
Pre-empt the questions the regulator is likely to ask and include explanations. This will help reduce the number of questions the regulator raises prior to signing-off the return.
2. Triangulate!
Examples include:
- Explaining differences between the Statistical Data Return – also a regulatory requirement – and FFR stock numbers
- Check that the loans and cash, in year one of the model, agree with the April Quarterly Survey (QS) Return. The cashflow in the QS may be different due to timing differences but explaining material differences will demonstrate that you understand your numbers
4. Validation
Time spent on checking, validating and challenging data inputs is not time wasted. The old IT adage ‘garbage in garbage out’ still applies. It’s particularly important to ensure that the covenant calculations in the model accurately reflect the definitions in the loan documentation.
1. Establish accountability
Our top three tips regarding accountability are:
- Establish clear accountability for returns with a member of the executive team.
- Produce internal guidance notes setting out sources, calculations, timetables, responsibilities and lessons learned.
- Include in the timetable a clear period, prior to submission, for careful quality control by someone who has not been involved in the data collation.
2. Triangulate!
Examples include:
- Explaining differences between the Statistical Data Return – also a regulatory requirement – and FFR stock numbers
- Check that the loans and cash, in year one of the model, agree with the April Quarterly Survey (QS) Return. The cashflow in the QS may be different due to timing differences but explaining material differences will demonstrate that you understand your numbers
3. Pre-empt the regulator’s questions
Pre-empt the questions the regulator is likely to ask and include explanations. This will help reduce the number of questions the regulator raises prior to signing-off the return.
4. Validation
Time spent on checking, validating and challenging data inputs is not time wasted. The old IT adage ‘garbage in garbage out’ still applies. It’s particularly important to ensure that the covenant calculations in the model accurately reflect the definitions in the loan documentation.
“Ensure sufficient time for a ‘second pair of eyes’ who has not been involved in the modelling process to review it.”
5. Price base
In addition, be mindful of the price base you are working with and the impact of inflation, e.g. does inflation apply at the same rate across all income and cost variables? If not, then the model will have to be able to cope with applying inflation at differential rates, and you need to have a basic grasp of the impact that this is likely to have on the end result.
If using stock condition data for asset management spend, you need to inflate it to bring it to the correct base year. Also consider adding VAT and professional fees to the investment spend data emerging from the surveys.
6. Two eyes
Ensure sufficient time for a ‘second pair of eyes’ who has not been involved in the modelling process to review it. Additionally, if using financial modelling tool Brixx, it does not populate all the lines and cells of the FFR, so these will need to be calculated and a copy of the calculations retained.
7. Board ownership of forecasts
It’s important for the board to have ownership of the forecasts. Best practice would include the board agreeing the strategic direction of the organisation and making available the appropriate resources to deliver it. The board should be involved in deciding the base case assumptions and which stress tests need to be run at the start of the business planning cycle. They will of course also agree the budget as year one of the plan, and formally approve the final version.
8. Check key outputs
Check that the key outputs in the FFR submission – such as surplus, net assets, cash and loans – agree with those in the board paper presenting the financial plan, or the differences should be explained in the submission.
9. Review last year’s questions
It’s important it is to review last year’s questions from the regulator: how they were resolved and if they apply to this year. This will ensure that the regulator is not asking the same questions year after year.
10. Regulatory expectations increasing
Regulatory expectations of stress testing continue to grow and that what was acceptable three years ago now no longer meets the grade. Questions to ask include:
- Does stress testing of the plan take place in a way that can demonstrate a clear line of escalation covering the variables?
- Are the single variable tests such as general and differential inflation, interest rates and specific local factors then grouped in increasing severity, such as with a ‘mild’, ‘bad’, ‘very bad’ and ‘perfect storm’ progression?
Testing in this way will give a very clear walk through of how robust the plan is. For example, concluding that it can easily sustain a mild and bad set of scenarios, but falls at a ‘very bad’ level. This can also be achieved by testing single variables for realistic changes in values as well as testing to breaking point. The latter will give you a clear indication of the variables your plan is most sensitive to.
11. Single variable tests
It’s strongly recommended to use the single variable tests to draw a direct and clear line from the board’s top risks to the stress testing. For example, reflecting housing market risks in testing the impact of different changes to sales values and timing, or illustrating the impact of different outcomes of government rent policy or fire safety remediation costs.
We have found the following steps to be a good way to deliver assurance of financial resilience to both the board and the regulator:
- Present the results of single variable tests in a table that highlights the changes from the base case.
- Use the RAG (red, amber, green) approach to rate the impact on the board’s agreed golden rules and tightest financial covenants.
“Use the RAG (red, amber, green) approach to rate the impact on the board’s agreed golden rules and tightest financial covenants.”
12. Financial planning – all year around!
All our CT colleagues agree that reviewing and updating the financial plan may no longer be an annual event. For some organisations it may need updating as part of any significant decisions made during the year.
While the financial regulatory regime for local authority providers is (currently at least) less onerous as far as the regulator is concerned than that for housing associations, many of the principles identified in this paper should equally be applicable to local authorities when constructing Housing Revenue Account business plans.
The degree of rigour applied to business planning should be equal regardless of the sector. Given the increasing financial pressures being faced by councils – including as a result of the consumer standards regulatory requirements – stress testing of key variables within the plan should form part of the process for each major update.
Finally, such is the importance of the financial model as an aid to decision making and as a control to reduce risk, that it should be externally validated once every (say) three years.
