Financial appraisal

for heritage projects

October 2008

You can get more copies of this guidance by:

• downloading it from www.hlf.org.uk;

• emailing [email protected];

• phoning our helpline on 020 7591 6042;

• contacting us by textphone on 020 7591 6255; or

• using Text Direct 18001 020 7591 6042.

If you need a copy of this guidance in an alternative format (large print, Braille
or audio version), or if your first language is not English, we can provide it in the
appropriate format or language if you ask us. It is also available in Welsh.
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Financial appraisal for heritage projects

Welcome
The Heritage Lottery Fund (HLF) was set up in 1994 to distribute money raised
by the National Lottery to heritage projects throughout the UK. In our first
12 years we awarded over £4 billion in grants to over 26,000 projects, from
multi-million-pound investments in well-known sites and buildings to small
grants making a big difference to community groups.

The Heritage Lottery Fund’s strategic aims are to:

• conserve the UK’s diverse heritage for present and future generations
to experience and enjoy;

• help more people, and a wider range of people, to take an active part in
and make decisions about their heritage; and

• help people to learn about their own and other people’s heritage.

We produce a range of guidance to accompany our funding programmes and

application materials. These are designed to illustrate the type of projects we
can support and help you to prepare the information we need from you to assess
your application. We also aim to help you plan your project effectively and achieve
good-quality outcomes, for heritage and people.

We assess all applications to our Heritage Grants programme (grants over £50,000)
in two rounds. This is so you can apply at an early stage of planning your project
and get an idea of whether you have a good chance of getting a grant before you
send us your proposals in greater detail. At the first round you can also apply for a
development grant. If you are successful, this will contribute to the cost of planning
and developing your project up to your second-round application.

Under our Heritage Grants programme (grants over £50,000) we do not ask for a
separate business plan with your application, as most of the information we need
is included in the application form. However, if you are planning a large project,
or a project that is dependent on generating an additional revenue stream for
financial sustainability, you will need to demonstrate how you have arrived at
your income forecasts with your second-round application.

You should therefore read this guidance if:

• you are applying for more than £1 million for any type of project;

• your organisation will need to create significant new income streams in

order to sustain the benefits of your project in the long-term.

For a complete list of our guidance notes visit our website www.hlf.org.uk.
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Financial appraisal for heritage projects

Contents
1 Introduction 4
2 Links to other parts of your application 4
3 Assessing the market for priced services 5
4 Undertaking financial appraisal 9
5 Websites and online services 12

Appendices
Appendix A
Sources of information 16
Appendix B
Income and spending table 17
Appendix C
Cash flow 19
Appendix D
Glossary of common terms 22

Our offices 23
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Financial appraisal for heritage projects

1 Introduction
You should read this guidance if you are applying to HLF for a grant of more than
£1 million, or if you will need to generate a significant new income stream in order
to sustain your project in the long term. We will ask you to demonstrate that your
plans for doing this are robust in your second-round Heritage Grants application.

No two heritage projects are the same, and you will need to interpret how to apply
this guidance to your own circumstances. It is designed primarily for heritage
projects that plan to make a charge for entry, or for use of facilities or for other
services provided, for example:

• venue hire;

• catering;

• retailing.

If your project is not based at a physical heritage site, but will be dependent on
generating a revenue stream (for example, from a website), you will still need to
undertake a market and financial appraisal (see section 5).

This guidance explains how to do that and how to present the evidence for your
project’s financial viability in your second-round application.

2 Links to other parts of your application

The application form for Heritage Grants asks you to provide most of the
information normally found in a standard business plan:

• Information about your organisation (section 1)

• How you have arrived at your project proposals (sections 2 and 3)

• The strategic background and project aims (section 3)

• The market for your project and who will benefit (section 4)

• The project details, timetable and costs (sections 5 and 6)

• Information on your management and staff (section 5)

• Risk assessment (section 5)

• Monitoring and evaluating your project (section 7)

Two key outputs from your market and financial appraisal will be your income
and spending table and cash flow table (see the appendices for examples). The
first relates to the ongoing financial sustainability of your project and the second
to your capital expenditure as the project progresses. You will need to ensure
these fully reflect the project details provided in the application form and take
account of the costs and income identified in your activity plan (see below). If
your project involves conservation or capital works costing more than £200,000
you will also need to draw on information in your costed 10-year management
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Financial appraisal for heritage projects

and maintenance plan, or conservation management plan. You should provide a

commentary on how you have arrived at the figures based on your market and
financial appraisal.

During the development period between your first and second-round applications,
your approach to assessing the market for your project needs to be an integrated
part of the wider planning process for engaging people with your heritage. Our
guidance Thinking about audience development contains useful sources of help and
further information on this. We use the term audience to describe all the people
who might be involved in, or come into contact with, your heritage through the
project you are planning. This includes your current users and visitors, and
people attending events and participating in activities, as well as people you
would like to attract. It includes volunteers and members of Friends groups, your
staff, and your trustees or board of management. For priced services, some or all
of these people may form your potential market.

3 Assessing the market for priced services

In assessing the market for a heritage site or visitor attraction, you must consider
such issues as:

• where visitors are likely to come from geographically, whether they will be
tourists staying overnight in the area, visitors on a day trip or local residents;

• what sort of groups will come, for example the percentages of adults, older
people, schoolchildren and so on;

• how often they will come;

• how much time they will spend;

• how much they will pay to use or visit the facility (if relevant);

• how much they will spend in your shop, café or other outlet (if relevant).

Target market
Your target market is the group or groups of people that you consider will be most
attracted to your heritage, whether it is a single item, a collection, building, site,
or a combination of different kinds of heritage.

In identifying your target market, you should take account of your current situation
(how many visitors and users you have now), the profile of your heritage (is it of
local or national interest, is it well-known?), and whether it is likely to be valued
by a wide cross-section of the public or a more limited special-interest group.

You should be realistic when deciding who should be the focus of your market.
For example, a local nature conservation project may well include in its target
market local residents, family groups, and educational groups. It is less likely that
it would be able to draw significant numbers of tourists or day visitors. This does
not mean that nobody from these categories is likely to visit, but they will probably
not be the main market. You should also remember that the tourist market is
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notoriously competitive and that it can be subject to fluctuations in response to

larger economic and other factors which tend to be outside of your control (e.g.
terrorism threats, epidemics such as SARS or foot-and-mouth), whereas your
local market tends to be more stable.

Total market size

When you have decided who your target market is, you should gather as much
information as possible on the total size of that market. This is not an estimate
of the number of people who are likely to visit your project, but rather the total
number of people who make up the population from which your visitors will come.

Depending on your target groups there are different sources of information

available, many of them now online:

• Local councils hold information on the current and estimated population of

specific areas. You can also access demographic information via the Office
of National Statistics – see www.ons.gov.uk/census/get-data/index.html

• Area and national tourist boards hold information on the number of tourists
and other visitors, including day-visitors and business visitors, to specific
areas. These sources can also give you information on the number of visits
to many attractions within a specific area.

• Education authorities can provide information on the number of school

children or students in any area. (See also www.dcsf.gov.uk/rsgateway)

If your project is likely to appeal to specialist groups, you should contact any local
or national associations to see how many local members they have.

See Appendix A for some further sources of information.

As well as the resources above, there are a number of professional companies

who (for a fee) will provide more specific information and other data – for
example travelling times and the percentage of the population in certain socio-
economic groups likely to visit different types of attraction.

Market trends
As well as assessing the total size of the market, you should identify and provide
information on trends, looking at how your markets have changed in the past few
years. For example, tourist boards will have information over a number of years
to show the changes in visits by various groups at a regional and a national level.

Some sources will provide forecasts of how markets may change in the future.
These forecasts cannot be guaranteed, but they will give you an idea of how your
markets could change over time. If you are a new organisation with limited market
knowledge, try to identify and talk to organisations operating in the same or
comparable field who have a good knowledge of the market and a perspective on
market trends. A number of sector organisations conduct their own data gathering
and research projects and may have useful information to share.
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Comparative analysis
When you have decided on the size of your total target market, you should examine
comparable attractions or type of project. You should consider these at the local
level and at national level.

In each case the information you gather should allow you to compare your own
proposed facility, service or attraction with what else is on offer. The more relevant
information you can gather, the more confident you can be that the visitor or user
forecasts that you make are relatively reliable and that you can defend them. This
will also allow you to set a realistic pricing policy.

In relation to other local attractions, your facility will be competing directly for
local residents and groups, day visitors and tourists, of which there is likely to be
a stable number, unless your heritage is well known or of particularly wide appeal.

For comparable regional or national facilities, you should look at attractions which
are as similar as possible to your own. However, it could also be useful to compare
those on a larger or smaller scale if they are very similar to yours in other ways
(such as having a similar heritage focus).

You should set out in simple tables the main information you have gathered for
comparable local and national attractions. This should include:

• the name of the attraction and where it is based;

• its theme;

• how long it has been operating;

• the facilities it provides;

• its admission charges if these apply for each visitor category (adults,
children, students, older people, groups and so on);

• its visitor figures for recent years (e.g. the last three); and

• its opening times (does it open every day, is it open all year or only at
certain times?)

When benchmarking your visitor projections you should check with your
comparator organisations what their published visitor figures include – in particular
whether it includes non-paying visitors, e.g. attendances at evening or other events
outside of normal working hours. Ideally you should get a full breakdown between
different visitor categories, although this can be difficult to obtain.

The easiest way to start is to consult their website. You can also access their annual
accounts (if they are registered charities) via the Charities Commission website
(www.charitycommission.gov.uk/) which will give you details of their income
and expenditure profile. This may be useful for benchmarking your income and
expenditure projections (see next section).
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Using your information about similar attractions, particularly those that are local
to you, you should now be able to set realistic pricing policies, broadly in line with
what the market can support (for example, for admission). Visitor categories
might include:

• adults;

• children;

• family groups;

• concessions (older people, students, unemployed);

• educational groups;

• other groups (for example, parties of ten or more); and

• season tickets.

Finally, you should consider how your visitor number is likely to fluctuate from the
first year post project completion (when you are likely to benefit from renewed
interest and publicity) to the following years when you will settle into a more
normal pattern. Again, it can be useful to look at the experience of comparable
organisations in your neighbourhood or elsewhere who are a few years ahead of
you and can share their experience with you. You should also take account of any
known future changes in the local environment (for example, local population
growth from increased housing development).

Penetration rates analysis

Another route to establish your likely visitor or user forecasts is to use a technique
called ‘penetration rates analysis’. This is usually only worthwhile on very large
and high-risk projects. It is not an exact science, and can be challenging to carry
out, but it allows you to look at the range within which your visitor numbers are
likely to fall, comparing them to other local or national organisations.

Penetration rates are the percentages of the total number of people in any given
population that actually visit or use your attraction. For example, if the total adult
population within a 30-minute journey of a local attraction is 500,000 and 5,000
locals visit or use it in any one year, the penetration rate in the local market is 1%.

You are unlikely to get market penetration rates from comparable attractions.
You will therefore have to estimate total visitor numbers and estimate how
many visitors will be attracted from each market. You then have to work out
the penetration rate. A penetration rate of more than 5% will be very difficult to
achieve in anything other than exceptional circumstances.

You should consider a range of penetration rates, as these will generate a range
of visitor or user numbers representing high, medium and low scenarios. These
different scenarios are critical for you to think about the risks you may face and
how you can work to reduce, as far as possible, their effect.
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Financial appraisal for heritage projects

Capacity analysis
When making your forecast of visitors and user numbers, you should take
account of the size of building or space available. In your second-round
application we will expect you to show your analysis based on estimates of the
size of your building (if relevant), the average time spent at the attractions, your
opening hours each day and the opening days each year. This will allow you to
work out the maximum number of visitors each day or year. Your user or visitor
forecasts should not be greater than this figure.

Your conservation management plan should help you think about the maximum
number of visitors your building (or parts of it) can accommodate at any one
time without causing a conservation or health and safety risk.

Remember that the figures provided by your penetration rate analysis will relate
to the visitor numbers you can achieve when your project is fully up and running
and people have become aware of it.

4 Undertaking financial appraisal

Section 7 of the Heritage Grants application form at the second round asks you to
tell us how you will ensure that your project is financially viable in the long-term.

Your financial appraisal sets out all of the financial implications of your proposed
project. You should explain the basis of each item of income or spending, and
prepare tables or spreadsheets setting out the income and spending on a monthly
basis for the first year and then by year for ten years. We have included forms for
the income and spending statement and cash-flow statement in Appendices B
and C.

If you are an existing organisation you should base your analysis on your latest
completed financial year (or the current year budget) and use this as a starting
point for your projections so that you can clearly assess the net impact on your
financial position from the incremental, ongoing income and expenditure caused
by the project you are proposing.

Income
Many projects will produce an income. This may include earned income,
contributed income or both.

Earned income is based on the income from providing facilities, activities or

services to user groups or markets in return for which they pay a fee or charge.
The market analysis you carry out will give you details of your market size and
the user charges. You can use this information to estimate the monthly income
you will earn. You should break down your projections so that they clearly show
what the numbers are made up of, e.g. number of projected visitors by category;
proposed charge per category; projected retail and catering visitor spend per
head etc.
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As well as income from user charges, you should also include any contributed
income from donations, sponsorships or grants. Give details of the anticipated
income from these sources and explain the basis of these figures.

Spending
Providing facilities, supporting activities and delivering services will create costs
for your organisation. Your project may involve delivering an increased level of
activity or service. Your income and spending plans should take account of this.
You need to identify all the potential costs that your project will generate and
estimate what those costs will be each year. Remember that your costs can vary
from year to year.

You should break your projections down as much as you can into each distinct
cost category.

The most significant costs will probably be staff costs (which usually accounts for
40–60% of total cost, depending on the balance of staff to volunteers). You
should estimate the costs of employing paid staff in your application, along with
the various costs associated with using volunteer staff.

The costs of employing paid staff must reflect the salary levels for the expertise,
the experience needed and any special factors influencing employment costs in
the local area. You should compare the salary for the employed positions in your
organisation with positions in other organisations. Job recruitment adverts in local
and national press and specialist publications (e.g. Museums Association Journal, Arts
Professional) will provide comparisons. Remember to allow for employers’ National
Insurance costs, pension contribution (if offered) and any other allowances.
After staff costs, there may be other unavoidable costs connected to any land and
buildings you are responsible for. You will need to get advice to estimate the costs
of insurance, maintenance, utilities, rates (if these apply). If you are spending
more than £200,000 on capital or conservation works, we ask you for a costed
10-year management and maintenance plan for your site (or a full Conservation
Management Plan if your grant request is over £1 million). These costs should be
reflected in your income and spending table. (See our guidance Management and
maintenance planning and Conservation management planning.)

If you plan to rent premises, the terms and conditions of the rental agreement
should be agreed in principle and included in the estimates.

If the focus of your project is a heritage object or collection, you should include
the costs of curating, conserving and documenting it.

You should make adequate provision for the cost of marketing activities (including
maintaining your website) as well as for any proposed programme of events or
exhibitions contained in your activity plan. Some of these may be covered by
grants, in which case make sure you state clearly your assumptions.
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Your project may also create extra general costs associated with operating an
organisation. If you are an existing organisation, you will have to pay a number
of these already. These include such items as:

• professional fees for accountancy and legal advice;

• office costs such as stationery;

• phones, and other items; and

• travel and transportation costs.

If you are a grant-aided voluntary sector organisation, with no other means of

covering your costs, you may apply for a contribution to these costs (known
as overheads) under our support for ‘full cost recovery’. (See our guidance
Understanding full cost recovery.)

There may be a number of specific items connected to the particular services and
activities your organisation provides that are not covered under staffing or the
other operating costs highlighted above. The basis of each estimate of spending
should be clear and based on evidence from a suitable source.

Contingency
Finally you should consider including a contingency allowance to cover the risk
of unforeseen circumstances. You should apply this as a percentage (within a range
of 5–10%) of expenditure but only apply it to non-staff costs as payroll costs are
not usually subject to unforeseen variations.

Inflation
You should provide adequate provision for inflation where you are likely to see
costs increase from current levels – e.g. staff salaries, utilities costs, buildings
costs. You can either use one inflation rate across all expenditure categories, or
(better) consider that different cost categories are subject to different levels of
cost inflation (e.g. payroll, building related costs, energy/utility costs).

Income usually does not rise in line with inflation. You should review your pricing
policies and charges regularly.

Financial viability
Use the income and spending tables to find your yearly surplus or deficit. If your
project is likely to result in a continuing deficit each year (which means that your
spending is more than your income), it is not viable and we would not give you a
grant. In these circumstances you will need to review your plans and find out
whether you can get any extra earned or unearned income. If your project is
likely to create a surplus of income each year over your spending, you should
consider how much this surplus would be affected by changing any assumptions
in your plans (for example, about visitor numbers or overheads). You do this by
carrying out a sensitivity analysis.
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Sensitivity analysis
Sensitivity analysis is a way of testing the financial strength of your project plans
by varying a number of the income and assessing the effect on the reported surplus
or deficit.

You should choose the income items which are most critical to your project’s
success and those which are most uncertain or contain the greatest risk. Change
these items to see what the effect is on the reported surplus.

If any of your sensitivity tests results in deficits each year, you should consider
how you would deal with these situations. Include these explanations in your
answer to question 5c in the Heritage Grants application form.

If your project relies on earned income from specific markets, you should identify
the risks that may influence your user or visitor numbers. You should assess what
effect these risks may have on these numbers and the financial consequences
(for example, a fall in the numbers or overseas visitors or a competing attraction
opening). You will then have to explain how you would tackle these particular
financial consequences.

In some cases it is useful to produce a second set of budgets showing best-case

and worst-case scenarios. This will allow you to test how well your assumptions
on visitor numbers, income targets and costs stand up to changes in circumstances.
You may need to review your plans in the light of these scenarios.

5 Websites and online services

Assessing the market

For priced web-based services, market issues to consider include:

• Have you clearly identified your target market or markets?

• Are you being realistic in terms of your predictions on market size?

• What is your business model? You will need to develop appropriate targeting
and reporting mechanisms, depending on whether you are aiming to generate
income directly through transactions (e.g. selling physical goods, tickets,
licensing images for reproduction) or through other means, e.g. subscriptions,
advertising or sponsorship.

Target market
Your online service must be carefully designed with the target customer in mind.
It is essential to be clear on whether you are providing a specialist service aimed
at repeat users, a more general public service, or a combination of the two. You
also need to identify any distinction between open areas of the site which are
accessible to all and special subscription-based areas. Consider what percentage
of your online visits is likely to be from UK versus overseas users, and whether
any linguistic allowances need to be made for a high proportion of non-English
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speaking visitors. If you are trying to encourage repeat visits the site will need to
reward this through a range of constantly changing elements.

Market size
Market size for web services is notoriously difficult to estimate, since the internet
is by its nature global rather than local. You need to analyse the usage of any of
your existing online services to get a sense of your current market reach. These
should be looked at alongside those from one or two other similar established
services to get a sense of the potential marketplace (you will need to find other
organisations willing to share this data). The potential market size will help you
to estimate the maximum number of likely concurrent online visitors. This will
be essential to make the necessary technical allowances for the level of site traffic
your website will need to be capable of handling.

You also need to consider carefully who your competing online service providers
are and whether there are potential benefits to partnering on some or all aspects
of your online initiative.

Measuring service use

For transaction-based services, your e-business infrastructure should enable you
to report on income and trends and tailor the design of the site to maximise
revenue. For other business models (e.g. income from advertising) for any given
period you will need a range of website usage statistics to monitor such things as
total number of hits, unique visitors, and average page views. You also need to be
able to measure how these differ for the various areas of your site. There are a wide
range of different tools enabling you to monitor online visitor activity. These vary
from very simple pieces of software which are freely available, to much more
comprehensive tools with a purchase or license fee attached (one popular example
being WebTrends).

Financial appraisal
For web-based services the following financial issues need to be considered:

• Can you afford the initial development costs?

• Will you be able to support the long-term running and maintenance costs?

• How confidently can you forecast any income from or for the service?

• Can you guarantee the overall financial viability in terms of income vs.
expenditure?
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Spending
The development, maintenance and running costs of your online service need to
be carefully estimated. It is probable that the most significant investment will be
made in year one with the development of the service, but there are likely to be
some ongoing staffing costs as well as fees for the supply of technical services.

Development costs
Decisions need to be made whether development can be carried out through
specialist staff in-house, or more likely through enlisting the services of one or
more external agencies. If to be carried out internally you need to be sure that
you have the right skills in place or can afford to recruit them (the main case for
this would be if those skills are required for your organisation in the longer
term). If externally, you need to produce a clear statement of requirements and
assess the responses of a range of potential suppliers in terms of relative value
for money. In the case of large projects it may be that you need to separate out
the design and the technical services.

Maintenance
In terms of maintenance, it is unlikely that your online service will continue to
run and develop without some ongoing staff involvement. Websites are like any
other kinds of service in that they need to continually evolve and adapt in response
to user demands. It is likely that much of the necessary ongoing staff input will be
editorial rather than technical, and a careful balance needs to be struck between
the expertise retained in-house and that called on from outside. You also need to
consider the costs of housing this maintenance infrastructure in terms of office
space and expenses.

Other running costs

There are likely to be annual fees associated with website hosting, domain name
registration, and database or content management system licensing. There may
also be a fixed ongoing support fee attached to your outside development agency,
along with variable fees for any special updates. All of these things need to be
realistically accounted for in your spending plan. You can do this by identifying
comparable projects for cost comparison, finding precedents in the costs of
staffing elsewhere and by inviting initial cost proposals from potential suppliers.

Income
You need to estimate any income in relation to your online service and explain
the basis for these figures.

If the service is subscription-based you need to clearly identify the scale of charges.
You will then be able to work out the estimated raised income from your analysis
of the market size. If you are providing e-commerce services, you need to estimate
what percentage of site visitors will undertake a priced transaction, and the
anticipated spend per head.
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You may also be able raise income through advertising or sponsorship. For
example, there may be opportunities to partner with a technology provider in
delivering your online service. This might result in bringing you tangible cash or
in-kind support in return for you providing PR or corporate social responsibility
benefits.
Whatever the business model, it is important to be realistic in predicting earned
income.
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Appendix A

Sources of information

Commissioning Market Research

Liz Hill
Arts Marketing Association. 2000
Comprehensive guide to writing a research brief and commissioning outside
research. See www.a-m-a.org.uk/publications.asp

Prove it! A practical guide to market research for museums, galleries

and visitor attractions.
Useful basic guide to the elements of market research written for a museum and
heritage site audience. Available from Hertfordshire Museums Officer, County
Hall, Hertford SG13 8EJ. Tel. 01992 556649.

Thinking BIG!
Stephen Cashman
Arts Marketing Association 2003.

Introduction to marketing concepts with step by step guide and worksheets on

topics such as market segmentation, SWOT and PEST analysis. Summary can be
downloaded from www.a-m-a.org.uk

Visitor attraction trends

Comprehensive analysis of visitor trends plus visits data for individual attractions
from VisitBritain and the national tourist organisations
www.visitbritain.com
www.nitb.com
www.visitscotland.org/research
http://new.wales.gov.uk/topics/tourism
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Appendix B

Income and spending table

Forecast income and spending account

Existing organisations
last
complete current next
financial financial financial
year year year
year 1 year 2 year 3 year 4 year 5 year 6
£ £ £ £ £ £

New organisations
first
development operating
year year
year 0 year 1 year 2 year 3 year 4 year 5
£ £ £ £ £ £
Income
Earned income
Admission and
user charges
Catering
Retailing
Other earned income
Unearned income
Revenue grants
Donations
Sponsorship
Other unearned
income
Other income
Bank interest
Total income (A)
Spending
Direct operating
costs
Staffing
Premises
Equipment
Utilities
Marketing
Loss in value
Administration costs
Finance costs
Non-recoverable VAT
Total spending (B)
Operating surplus
or deficit (C)
(C = A – B)
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Appendix B

Income and spending table

Forecast income and spending account

Existing organisations
last
complete current next
financial financial financial
year year year
year 1 year 2 year 3 year 4 year 5 year 6
£ £ £ £ £ £

New organisations
first
development operating
year year
year 0 year 1 year 2 year 3 year 4 year 5
£ £ £ £ £ £
Taxation (D)
see note 1
Net movement
in funds (E)
see note 2
Surplus/(deficit) (F)
(F = C – D & E)
see note 3
Reserves brought
forward (G)
see note 4
Reserves carried
forward (H)
(H = F + G)
see note 5

Note 1 Taxation refers to any liability you have to pay UK income tax, capital gains tax or
corporation tax.
Note 2 Any reduction or increase in funds not included under income.
Note 3 The surplus or deficit is worked out by taking any taxation liability from the operating
surplus.
Note 4 Reserves brought forward are the surpluses and deficits which build up in the previous
accounting periods.
Note 5 Reserves carried forward are the surpluses and deficits which build up in the previous
accounting periods and the current accounting period carried forward to the next
accounting period. The sum can be positive or negative.
Heritage Lottery Fund 19
Appendix C

Cash-flow
A cash-flow statement is a forecast which shows, throughout the life of a project,
when you will receive income and when you will spend. You may have accurately
estimated the cost of your project and got all the necessary funding. You may also
know that over a whole year your income will be enough to cover all your spending
related to the project. However, you need to remember that throughout the life
of the project you will have to pay all the invoices you receive before you can
claim our share of the costs. The cash-flow statement will help you to anticipate
when there is likely to be a mismatch between income and spending, when there
may not be enough money in your bank account at certain times to pay bills as
they fall due. It will also help you to plan for these difficulties and take appropriate
action before serious problems arise. Remember, if you can reclaim VAT, make
sure your cash-flow takes account of the interval between the time you pay it out
and when you get it back.

The cash-flow statement is the main way you have to test whether your income
(both earned and unearned) is enough to meet your spending (payments to
consultants, contractors and suppliers or extra fixed-term staff costs, and so on).
Often it is prepared by an organisation’s treasurer or accountant.

How to set out a cash-flow statement

The most useful form of cash-flow statement for your project is likely to be a
monthly one. In the example on page 21, if you take the figure for total spending
(B) away from the total income figure (A), you will be able to see the likely
financial position of your organisation at the end of each month. This position
can be either a surplus or deficit.

By doing this, you will know whether you will receive more money than you
have to pay out in the month, or vice versa. Negative amounts in the cash-flow
can be shown either in brackets or with a minus sign in front of them, as in the
worked example. The income or spending for each month (see row 3 in the
example) is then added to the surplus or deficit which was left at the end of last
month (row 4 in the example) and has been carried forward from the previous
column. This then gives an overall figure for the month, either positive or
negative, which you then carry forward to next month. You repeat this process
for each month of your project.

In the worked example cash-flow, there is a deficit in February, shown by a minus

sign in row 3. In other words, total spending during that month (£13,230) was
more than the total income (£1,600) by £11,630. However, this deficit can be
covered by the £17,320 which was carried forward as cash in your bank account
from January (see row 3 in the example). As a result, there are no cash-flow
problems for your project at this time.

March also shows a deficit (– £6,930). However, you cannot cover this using the
cash in your bank account carried forward from February which is only £5,690.
The result is a cash-flow difficulty. This difficulty worsens in April and May as
further monthly deficits build up. At the end of May, the organisation is shown
facing a total deficit carried forward of £10,000. By the end of July, as a result of
Heritage Lottery Fund 20
Appendix C

the surpluses generated in June and July, the organisation can meet its planned
spending. For the rest of the year the organisation generates monthly surpluses,
resulting in an overall surplus at the end of the year. In this period you have
a healthy cash-flow and so will be able to pay your bills on time. In these
circumstances, you may want to consider spending the spare money on some
elements of the project sooner than planned (that is, bringing forward some
spending). Or, you could invest the money and earn interest.

Dealing with deficits

The cash-flow example reveals cash-flow deficits every month from March to
June. As a result, you need to find ways of providing several short-term injections
of cash totalling £10,000. You could overcome the mismatch in these months
between spending and income in several ways. For example, you could arrange a
bank overdraft, look for other sources of funding, or delay spending until you
have saved enough to cover the entire deficit.

Remember, if you arrange an overdraft, this will result in costs, including interest,
which you should include in the cash-flow statement. However, our grant does
not cover the costs of short-term borrowings to cover project cash-flow deficits.
In rare circumstances, we may be able to pay part of the grant up front to overcome
a cash-flow difficulty but you need to discuss this with your grants officer before
we make a grant.

Keeping your cash-flow statement up to date

It should be possible at the planning stage of your project to produce a monthly
cash-flow statement spanning at least two years. However, for projects which will
last three years and more, you may only be able to forecast cash-flow from year
three onwards on a quarterly (every three months) basis, until you have enough
information to return the forecast to a monthly basis. You will only see the benefits
of a cash-flow statement in successfully managing your project if you make sure
that you update the forecast every month as you know the true cash position.
 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
£ £ £ £ £ £ £ £ £ £ £ £ £
1 Income
1.a Earned income
1.a.1 Admissions 1,000 1,000 1,000 3,000 5,000 6,000 6,000 7,000 5,000 3,000 1,200 1,200 40,400
1.a.2 Retail 100 100 100 300 500 600 600 700 500 300 100 100 4,000
1.a.3 Catering 0 0 0 0 1,000 1,200 1,200 1,400 1,000 0 0 0 5,800
Appendix C

1.b Unearned income

Heritage Lottery Fund

1.b.1 Local authority

grant 500 500 500 500 500 500 500 500 500 500 500 500 6,000
1.b.2 Local trust grant 18,000 18,000
1.b.3 HLF grant
(capital project) 0 0 10,000 15,000 20,000 25,000 20,000 20,000 20,000 10,000 10,000 150,000
1.c Total income (A) 19,600 1,600 11,600 18,800 27,000 33,300 28,300 29,600 27,000 13,800 11,800 1,800 224,200
2 Spending
2.a Direct costs
2.a.1 Gallery staff 1,500 1,500 1,500 1,500 1,850 2,000 2,000 2,000 2,000 1,500 1,500 1,500 20,350
2.a.2 Travel 0 150 150 150 0 0 0 0 0 0 0 0 450
Cash-flow – application example

2.a.3 Training 0 0 500 0 500 0 0 0 0 0 0 0 1,000

2.a.4 Marketing 50 50 250 250 50 50 50 0 0 0 250 150 1,150
2.a.5 Retail and Catering 50 50 50 150 750 900 900 1,050 750 150 50 50 4,900
2.b property costs
2.b.1 Utilities 200 0 0 200 0 0 200 0 0 200 0 0 800
2.b.2 Cleaning 30 30 30 30 30 30 30 30 30 30 30 30 360
2.b.3 Maintenance 400 400 0 0 0 0 0 0 0 200 0 0 1,000
2.c Overheads
2.c.1 Administration 50 50 50 50 50 50 50 50 50 50 50 50 600
2.c.2 Professional
advice (legal and
accountancy) 400 400
2.d Capital project 0 11,000 16,000 22,000 27,000 22,000 22,000 22,000 11,000 11,000 4,000 0 168,000
2.e Total spending (B) 2,280 13,230 18,530 24,330 30,230 25,030 25,230 25,130 14.230 13,130 5,880 1,780 199,010
3 Net cash inflow/
21

outflow (A – B) 17,320 – 11,630 – 6,930 – 5,530 – 3,230 8,270 3,070 4,470 12,770 670 5,920 20 25,190
4 Net cash inflow/
outflow carried forward 17,320 5,960 – 1,240 – 6,770 – 10,000 – 1,730 1,340 5,810 18,580 19,250 25,170 25,190
Heritage Lottery Fund 22
Appendix D

Glossary of common terms

Balance sheet
This lists what you own and what you owe at the end of the accounting period.

Capital spending
The spending which will benefit the organisation for more than one accounting
period, for example, building work.

Capital income
Those incoming resources which you will use to pay for your capital spending.
You may use some incoming resources for capital or revenue spending, as you
decide. These are unrestricted funds. Restricted funds are provided by other
organisations for particular capital or revenue spending.

Cash-flow statement
The cash-flow statement assesses whether your organisation, even if profitable,
will have enough cash resources to allow you to meet all payments as they fall due.

Deficit
Your organisation would suffer a deficit if its operating spending each year was
more than its yearly income.

Project progress chart

Sometimes called a Gantt chart, this is used to illustrate, in bar-chart form,
information on the progress of a project. It shows the duration and start dates of
all the elements of a project.

Income and expenditure account

Shows whether you have made a surplus or a deficit during the accounting period.
Similar to a profit and loss account but for a not-for-profit organisation.

Surplus
Surplus is the amount left over when you have met all requirements. For example,
if your organisation has an income each year of £50,000 and operating spending
over the same period of £45,000, it will have generated a surplus of £5,000.
Heritage Lottery Fund 23
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