Business Planning - Advisory Guidance

About this document

1.1    Introduction

This Business Planning Advisory Guidance (BPAG) aims to assist Registered Social Landlords (RSLs) in Scotland in their approach to business planning.  It is intended to guide RSL governing bodies and management teams, but the principles may also be relevant for local authorities.

This refreshed BPAG builds on the principles of good business planning set out in our 2012 and 2015 Business Planning Recommended Practices (BPRPs). We have refreshed the BPAG to ensure that it remains relevant and reflects the significant changes in the RSL operating environment since 2015. This BPAG continues to take account of the recent experience of RSLs and our experience in regulating RSLs, current key risks and issues identified by stakeholders and emerging good practice. 

This BPAG is principles-based and it focusses on compliance with the Regulatory Standards of Governance and Financial Management (or the Standards).  Much of the business planning process is a technical exercise – for example in translating a stated set of objectives into a cash flow and associated risk-map – but it does require internal discussion and decision making, engagement with tenants and other service users and an intention to use the business plan as the ‘go-to’ document that guides and informs everything that the RSL does.    

1.2    The importance of business planning and asset management

Regulatory Standard 3.3 says: “The RSL has a robust business planning and control framework and effective systems to monitor and accurately report delivery of its plans. Risks to the delivery of financial plans are identified and managed effectively. The RSL considers sufficiently the financial implications of risks to the delivery of plans”.

The business plan is a key strategic document which communicates an organisation’s mission, vision and strategic objectives, and how it will achieve those objectives. The business plan should be central to the organisation’s strategic and operational decisions and reflect its approach to risk management. An RSL with subsidiaries – whether registered with us or otherwise – should generally have an overarching business plan for the group as a whole and individual business plans for each of the subsidiaries.

RSLs should design reporting and monitoring systems to allow managers and those charged with governance to judge the extent to which the strategic aims are being achieved, monitor the risks relating to the delivery of those objectives and provide early warning flags which then trigger any necessary action. It is for each RSL to decide how best to achieve this, based on its own circumstances.

An RSL’s ability to deliver good services for customers and provide a solid platform for improvement depends on its ability to make the most of its housing assets. The business plan should be underpinned by a robust approach to strategic asset management. RSLs should therefore develop strategic asset management alongside, and to complement, the business planning process. This BPAG should be read in conjunction with our Integrated Asset Management advisory guidance in particular but also other key information such as that relating to Annual Assurance Statements, and the Standards.  You can read more about this further below.

To help ensure resilience in the business plan, the RSL should ensure that the plan takes account of the strategic context, such as:

• the prevailing economic situation and expectations/forecasts for the time horizon of the business plan;
• the broader context for tenants and others service users such as rent affordability, cost of living, welfare policy and how the labour market is performing; and
• the broader context for landlords such as cost pressures in repairs, maintenance and development, supply chain issues, investment decisions in meeting net zero obligations and tackling homelessness.  Landlords need to manage these pressures while they provide other non-housing services to some tenants and other service users.

Recent years have shown how difficult it can be for RSLs to anticipate or mitigate every external event that may occur.  The frequency of review and refresh of the business plan should take account of the level of uncertainty and volatility in the sector, or a material change in the strategic context or operation of the business.

RSLs should publish their business plan on their website, and any separately documented updates to the plan that they undertake during its lifespan.  RSLs should consider how they can involve tenants and other service users in the content of the business plan particularly those sections that focus on vision, strategic objectives and stakeholder management, i.e. those elements of the plan that might be more customer facing.

1.3    Our expectations

RSLs must comply with regulatory requirements, including the Standards. This guidance is advisory, and therefore as with all advisory guidance, each RSL should consider this guidance and may decide to adopt the approaches set out in full, in part or not at all when considering how it meets those regulatory requirements that relate to business planning. We recognise that there may be reasons for an RSL to depart from the guidance.  Where this happens the RSL should have considered and understood why it is doing something different.

Under certain circumstances we may ask to see a business plan.  Where we do, we will explain when and why we require to see the business plan in the RSL’s engagement plan. 

1.4    Related regulatory guidance

All of our guidance and publications are available on our website at www.housingregulator.gov.scot.  RSLs may also wish to refer to any separate guidance provided by sector representative bodies.

Key Messages

In this section we highlight key considerations for RSLs in approaching business planning and producing the business plan.

Vision and Mission

The RSL’s approach to business planning should be directly informed by its vision for the future and its stated mission. A good vision statement will succinctly describe what the RSL hopes to have achieved in the future or the type of organisation it will become. The mission should briefly define how it will get there; i.e. the RSL’s business model, its objectives and the actions required to achieve them. The business planning process should also allow the RSL to explore opportunities including business growth and innovation. The process should be structured in a way which results in key decisions and agreed actions. The business plan should also be consistent with the RSL’s formal constitution (including its charitable objects for those RSLs which are registered charities). The business planning process should lead to the development and formal adoption of the business plan which should reflect the vision, mission and constitution of the RSL and clearly articulate its strategy, setting out the actions that will be taken to deliver it and how success will be measured.

Informed Consent and the role of the Governing Body

The RSL’s strategy and business direction should be determined by the governing body and management, and the business plan should reflect this. We expect the governing body, supported by management, to set out its vision, mission, strategic objectives and business direction and to ensure that the direction is fully supported by a consistent and deliverable business plan.  The RSL’s governing body and management should have a thorough understanding of its business plan and associated asset management strategy and the risks inherent in both. The governing body should provide oversight, direction and constructive challenge to management when constructing and delivering the business plan.

Value for Money

Value for Money (VFM) is about doing the right things, in the right way, at the right cost. Our statutory objective is to safeguard and promote the interests of tenants, future tenants and other service users and our approach to VFM is firmly rooted in that objective.  We view VFM from a tenant and service user perspective.

It is for each RSL to demonstrate both internally and to its tenants that VFM is being delivered. The cornerstone of our Regulatory Framework is the Scottish Social Housing Charter and the Regulatory Standards, and by complying with these the RSL will demonstrate delivery of VFM for tenants. 

Rent Affordability

There is an important relationship between rents, rent setting and VFM.  RSLs should consider tenants’ ability to keep paying their rent over the longer term when deciding levels of rent increases and they should:

• be clear on what is affordable for tenants and consider future affordability when determining annual rent increases;
• balance rent level decisions with business activities and wider investment and asset management obligations;
• demonstrate transparency on costs and a vigorous pursuit of VFM;
• engage in dialogue with tenants about costs versus service levels; and
• be clear on how tenants’ views are taken into account in determining rent levels.

Risk Management & Mitigation

RSLs should be aware of the inherent risks in their business plan and have adequate risk management and mitigation measures to ensure that tenants and other services users are protected. RSLs should identify the risks to its business. Some of these risks may be anticipated or persistent such as those arising from meeting statutory obligations, ensuring rent affordability or treasury management.  There may also be shorter term or unanticipated risks that arise from events such as wider economic shocks or national policy change.

Risk management should consider sector-based risks and those specific to the individual RSL’s business e.g. care and support delivery or short-term refinancing risks.

RSLs should record identified risks and mitigations in the business plan and regularly review these.

Asset Management

A strategic approach to asset management is fundamental to future viability. Each RSL should ensure consistency between its business plan and asset management strategy. They should ensure that they have good, up-to-date stock condition data and use that to inform a 30-year financial investment programme that underpins both the asset management strategy and the business plan. RSLs should have a good understanding of the long-term value that individual properties and different groups and types of stock bring to the business. Informed strategic asset management decisions will help ensure that resources are used effectively and should reduce the risk of longer-term inefficiencies occurring.

Treasury Management

Each RSL should be able to demonstrate effective treasury management arrangements that comply with the CIPFA code, best practice, and seek to protect social housing assets. They should have effective systems to monitor and report regularly to the governing body on covenant compliance. RSLs should be aware of lenders’ timescales for testing covenants and ensure that the implications of any breach are understood. Regular reporting to Governing Bodies should be in place to ensure any potential risk of breach is detected early and appropriate action taken.   RSLs should clearly understand their liquidity position and timing of future funding requirements and any risks to achieving these. Each RSL should monitor across the full 30-year financial business plan compliance with its Treasury Management Policy, including covenant compliance, cash holding and future borrowing requirements. It should also assess sensitivity testing for the impact on these measures.

Stakeholder Management

As part of the business planning process it is important to develop a comprehensive stakeholder map.   RSLs have important relationships with many stakeholders including tenants, other service users, lenders, regulators, local authorities and the Scottish Government. Robust business planning processes and a clear business plan will assist the RSL in building and maintaining constructive relationships with key stakeholders. A credible business plan is essential to provide assurance for lenders around future financial viability, governance and performance. Tenants and other service users should be consulted given they are the customers of the business. 

Financial Planning

Good financial planning and robust monitoring of performance should help ensure that RSLs minimise insolvency risk. This guidance sets out some core financial planning principles which should give clarity around the financial health of the RSL and help ensure financial well-being and economic effectiveness.

People Management

The RSL’s people – staff and governing body members – action and deliver the plan.  A credible plan should recognise the importance of the role of staff and the governing body and link to people related strategic documents such as those on learning and development and succession planning. 

The Regulatory Standards

RSLs must comply with the Standards listed below. These Standards are designed to underpin the way in which RSLs are managed and governed. RSLs must take them into account in their strategic business planning processes. 

The Regulatory Standards

1.  The governing body leads and directs the RSL to achieve good outcomes for its tenants and other service users.
2. The RSL is open and accountable for what it does. It understands and takes account of the needs and priorities of its tenants, service users and    stakeholders and its primary focus is the sustainable achievement of these   
3. The RSL manages its resources to ensure its financial well-being, maintaining rents at a level that tenants can afford.
4. The governing body bases its decisions on good quality information and advice and identifies and mitigates risks to the organisation’s purpose.
5. The RSL conducts its affairs with honesty and integrity.
6. The governing body and senior officers have the skills and knowledge they need to be effective.
7. The RSL ensures that any organisational changes or disposals it makes safeguard the interests of, and benefit, current and future tenants.

This BPAG aims to help RSLs to comply with the Standards in their business planning processes. It takes each Standard in turn and sets out the principles we expect RSLs to observe in this context.

Each RSL should apply the Standards to its business planning process in a way that is proportionate to its size and profile.

There is no single best way to go about developing a business plan, but most processes have common features and follow a broadly similar pattern. It is for each RSL to determine the most appropriate process and planning cycle. 

Business Planning and the Regulatory Standards of Governance and Financial Management

4.1    Regulatory Standard 1

The governing body should set the strategic direction and provide the necessary challenge when required.

Regulatory Standard 1

“The governing body leads and directs the RSL to achieve good outcomes for its tenants and other service users”.

Compliance with this Standard should ensure that good business planning is at the heart of the RSL, including strong governance, effective management and financial viability. It should also help to deliver good outcomes for tenants and other service users.  

The following principles should help to ensure compliance with this Standard:

• the approach to business planning should reflect the RSL’s vision, mission statement and strategic objectives, as well as its constitution and be aligned to other key strategies the organisation may have such as equalities, workforce planning, environmental and cyber security.  This approach should ensure that the business plan reflects the vision and leadership of the RSL and allows the exploration of opportunity and innovation where appropriate.

• although the process will be led by the governing body and management, a whole organisation approach should be adopted with an understanding and ownership right across the RSL.
• the business plan should support day to day decision making and be updated as required depending on the level of uncertainty and volatility in the sector or in response to a material change in the strategic context or operation of the business.  
• the business plan should have informed consent. The governing body and management should understand and determine the business direction and ensure that the business plan is consistent with that direction and enables the RSL to deliver its strategic objectives.
• a clear and consistent approach to business planning should be adopted. The business plan should reflect and complement other strategies and plans, and clearly link with the asset management strategy and financial plans. It should be supported by an appropriate range of plans which cover all the RSL’s business activities and any subsidiaries.
• asset management and service planning are crucial elements of business planning. The business plan should answer the questions of “Are we doing the right things?” and “Are we doing things right?” 
• the business plan should reflect the strategic direction chosen by the governing body.  Strategic options appraisal should be part of the business planning process.   Appendix 1 sets out a suggested approach to this.

4.2    Regulatory Standard 2

RSLs have many important stakeholders including tenants, other service users, lenders, regulators, local authorities and the Scottish Government. The primary purpose of the business plan is to guide operations and strategy, but it is also a means of engaging and informing stakeholders about future plans.

Regulatory Standard 2

“The RSL is open and accountable for what it does. It understands and takes account of the needs and priorities of its tenants, service users and stakeholders. And its primary focus is the sustainable achievement of these priorities.”

Compliance with this standard should ensure that the business plan reflects the needs and priorities of tenants, service users and, as appropriate, the interests of other key stakeholders.

The following principles should help to ensure compliance with this standard:

• the RSL should actively manage and build constructive relationships with key stakeholders. It should understand how it is perceived by key stakeholders and use the business planning process and the business plan to provide assurance to them.
• stakeholder intelligence should be used to set a positive culture with a strong customer focus, and this should be embedded throughout the RSL.
• RSLs should understand how the business plan is aligned to the objectives of key stakeholders. This can be facilitated by appropriate stakeholder and customer mapping and engagement.  Stakeholders (internal and external) and customers would include tenants, other service users, lenders, staff, community organisations, and the Council(s).
• the business plan should reflect a good understanding of tenants’ and other service users’ needs and expectations and provide quality information that meets these.  It should where appropriate take into consideration tenants’ surveys and tenant scrutiny panel’s views.
• the business plan should be sustainable and should demonstrate a good understanding of what tenants and other service users want, based on robust evidence.
• the business plan should reflect a good understanding of how priorities and needs are changing over time and the business impact of adapting to these changes.
• the RSL should have a good understanding of lenders’ requirements. A robust business plan is key to providing assurance around future financial viability and stability. Some RSLs have considered Environmental, Social and Governance (ESG) criteria as one way to provide assurance to lenders.
• the business plan should be based on an understanding of the current and potential future operating environment.  This can be facilitated by appropriate environmental analysis and Appendix 3 of the BPAG sets out a suggested approach to this which may be helpful.

4.3    Regulatory Standard 3

The governing body needs to be satisfied as to the integrity and robustness of the business plan and the supporting financial models.

Regulatory Standard 3

“The RSL manages its resources to ensure its financial well-being, while maintaining rents at a level that tenants can afford to pay.”

Compliance with this Standard should ensure financial viability, a robust approach to business planning and business plan outcomes.  Robust financial planning should be at the heart of the business planning process.  This can be achieved by embedding appropriate principles of financial planning at the following different stages of the planning process:

• linking the financial plan to key strategies;
• developing the financial plan; and
• producing and understanding adequate financial plan outputs.

Linking the Financial Plan to Key Strategies

The financial plan should support strategic objectives, priorities and decision making and should be closely linked to:

• performance management supported by appropriate Key Performance Indicators (KPIs);
• a VFM strategy which should incorporate an effective monitoring system; and
• a procurement strategy which should aim to build flexibility into contracts and achieve the best VFM.

There should be an alignment of the financial plan to the budget structure.  This should ensure clear links between long term forecasts, investment plans, short term annual budgets and medium term five-year financial projections.  These should all be readily available, consistent, monitored and updated at appropriate intervals.  These should be consistent with the corresponding budgets presented for approval to the governing body.

There should be an integration of asset management / investment planning and financial planning by using appropriate business planning tools supported by a fully costed asset management strategy.  This should feed into scenario testing of investment options which should enable the financial impact of any future investment options to be appropriately assessed.

There should be an adequate strategy to maintain service delivery at appropriate levels.  The correct mix of assets, skills, and infrastructure will be required to deliver good value to tenants and other service users.

Developing Financial Plans

The financial profiling of expenditure should capture the impact of all future investment decisions and be supported by appropriate trend analysis. 

Evidence-based planning should be used to clearly demonstrate that there are sufficient financial resources available to undertake planned activities to deliver objectives, sustain services and maintain assets. 

A zero-based budgeting approach is an option that could be used to show that all planned expenditure is justified.  The chosen approach to budgeting should take into consideration:

• the risk impact associated with rent affordability, welfare reform, pension costs and grant allocations; and
• other significant variables which may negatively impact on operations.

The cash flows of all activities in the short, medium and long term should be adequately planned, monitored and controlled to ensure long term financial viability. Effective management of cash is crucial and should ensure:

• a good understanding and evidence of business plan cash forecasts;
• a good understanding of the necessary controls to mitigate risk and maintain covenant compliance; and
• a good understanding of the demands on cash flows and funding requirements. The adoption of financial health check indicators can further help liquidity planning.

RSLs should have a good understanding of their organisational cost structure. This will enable an assessment of future financial viability taking into consideration the impact of all future rental scenarios.  To achieve this, clarity is required on:

• resources and the ability to ensure that any cost increases can be linked to effective improvements in the services provided and assets managed;
• high expenditure areas and the proportion of tenants’ rent which is devoted to these areas; and
• which costs are controllable or uncontrollable and the contribution level that each business activity achieves.

 Producing Adequate Financial Plan Outputs

The aim of financial reporting is to ensure the provision of accurate, quality and timely management information to appropriate internal and external stakeholders. This should be achieved by producing clear and meaningful summary reports and providing key financial indicators and accounting ratios. This should then allow the assessment of different strategic activities. Good financial reporting should also help to achieve the following key financial reporting outcomes.

Key Financial Reporting Outcomes

• Cash position - good understanding of the demands on cash flows, alongside accessibility and availability of funds, and how these are linked to the business plan pressure points.
• Debt & covenant position – information, covenant and security, requirements of lenders and other stakeholders, including regulatory expectations are fully met.
• Rent affordability - good understanding of how the rent policy impacts on tenants, covenants and loan security values, both now and in the future and what effect changes to this policy will have on the RSL’s sustainability.
• Level of investment – good understanding of the investment requirement needed to sustain services and maintain assets over their lifetime and what impact these funding requirement levels have on the financial stability, policies and strategies of the RSL, e.g. Private Finance and Rental Policy.
• Development programme – original forecast and performance against that forecast and impact on cash flow and funding requirements.
• Level of contingency – good understanding of how to react to unforeseen circumstances and what levels of working capital are available to deal with negative eventualities.
• Trigger points – setting of and monitoring of trigger points, which measure performance against an agreed level of headroom over and above lender covenants and other key indicators, thus providing advance warning to the RSL and allowing time to implement pre-agreed mitigating strategies.
• Performance Indicators – clear insight into which aspects of the business are working well, where improvement is required and how the business compares with other RSLs and other relevant organisations.

The governing bodies of RSLs are responsible for managing the risks their organisation faces and stress testing will enable them to gain a better understanding of those risks in a difficult and uncertain economic environment to ensure ongoing compliance with our regulatory standards.

Sensitivity analysis should ensure that the key assumptions are robustly tested against a series of individual stress tests and against combination of these individual stresses occurring at the same time.  This is to determine how volatile the business plan is to changes in the underlying assumptions and identify which operational and financial risks are the most detrimental to the RSL. The sensitivities tested should be appropriate to the business and concentrate on key risk areas facing RSLs.  Examples include interest rate risk, rent policy assumptions, cost and income inflation, occupancy levels (voids), arrears and bad debts and pensions.

Scenario planning can be used to develop insight into the circumstances in which management intervention may be required, the likely time and nature of potential plan failure and the options available to implement mitigating actions to prevent risks crystallising and to maintain solvency and covenant compliance.  Scenario planning should ensure that a range of severe yet feasible scenarios over and above standard sensitivity analysis are tested.  The Corporate Risk Map should illustrate the order of severity the key strategic and operational risks an organisation could face.  In order to test those risks, a business planning scenario and a combination of scenarios, should be devised to reflect that risk materialising.  Scenario planning can also consider the impact on the financial plan of different decisions taken.  Landlords need not attempt to anticipate specific events, but instead focus more on stress testing and scenario planning on understanding the points at which the business – and the business plan – comes under pressure and would eventually fail.

The business plan should summarise the sensitivities and scenarios tested and the financial impact, particularly on lenders’ covenants and liquidity. Sensitivity and scenario testing together with the RSLs defined risk appetite should be used to identify and establish a set of key risk trigger points which are set over and above lender covenants and liquidity measures identified by the business.  These key risk triggers should be measured and monitored on a regular basis through the RSL’s internal reporting to its various committees and governing bodies to highlight when a key risk is nearing an internal target or threshold. Reaching the trigger point will prompt the RSL to implement mitigating actions, such as pausing development, rephasing planned maintenance, ceasing non-essential expenditure. The RSL should also consider the timescale, cost, service delivery implications, reputational and other impacts of implementing the mitigations. 

The Financial Models which support the business plan should be in an appropriate format and be provided with sufficient detail.  Each RSL should set out the types of models that it uses and identify who has prepared each model.   Appendix 4 of the BPAG sets out a suggested approach to this which may be helpful.

4.4    Regulatory Standard 4

The governing body needs to ensure that it receives good quality information and advice from staff and, where necessary, expert external advisors.

Regulatory Standard 4

“The governing body bases its decisions on good quality information and advice and identifies and mitigates risks to the organisation’s purpose.”

Compliance with this standard in business planning should ensure a good understanding of the RSL’s financial position. This is a critical first step in evaluating the health of the RSL. The business plan should be based on:

• appropriate challenge and advice;
• quality information and robust assumptions;
• an appropriate Risk Management Strategy; and
• linked to the Corporate Risk Map.

Appropriate Challenge and Advice

The absence of effective internal challenge has been a common factor in many governance and financial failures across a number of sectors.  Each RSL should encourage a culture where staff members, senior management and members of the governing body provide constructive challenge to the business planning process and the business plan. This should include the governing body being fully involved in stress testing the plan and developing mitigating strategies.

RSLs should consider the role that internal audit can play in providing assurance that the business plan is on track and that the internal controls that support the achievement of the plan are functioning effectively.  Regulatory Standard 4.5 requires a RSL to have an internal audit function, and that the governing body ensures the effective oversight of the internal audit programme by an audit committee or otherwise. 

The role of the external auditor is to provide an opinion on whether the accounts for the year show a true and fair view.  It is not external audit’s role to certify compliance with the Standards. However, in order to arrive at its opinion on the accounts the RSL should ask the external auditor to plan its work so that it has a reasonable chance of detecting any material non-compliance with the Standards.  Each RSL should seek the view of its external auditor on the extent to which the auditor can provide assurance in relation to compliance with the Standards. The external auditor may also review the financial plan in order to provide assurance that the RSL is a “going concern” as part of the external audit report.  

Appropriate Quality of Information and Assumptions

The RSL should satisfy itself as to the integrity and robustness of the business plan, financial information and model.  The following principles should help to ensure this:

• the plan is founded on the most up-to-date and reliable data available on tenants, stock, other assets, services, staff, performance, contracts, finance, competitors and the external operating environment. This should be used to produce clear and succinct strategic and financial analysis.  Likewise, financial projections should be based on realistic assumptions which should be agreed by the governing body, be up to date and informed by data from credible sources eg BoE forecasts, or advice by suitably qualified advisors eg treasury advisors.
• financial projections in relation to asset investment, should be supported by an independent stock condition survey normally no more than 5 years old.
• the assumptions should be evidence based, clearly set out and regularly discussed at meetings of the governing body.  Any subsequent changes to the assumptions should be reflected in an updated business plan. Some RSLs have found it helpful to record the key facts which underlie assumptions in the form of a Data Book. Where adopted this has allowed a record to be kept of the most important data and assumptions that underpin the business plan.  The data source and data owner are recorded and updated whenever changes occur.
• the overall investment, maintenance and demolition expenditure is almost always the largest component of expenditure in any plan. It is therefore critical that the RSL is clear on what is required, when and how it will be achieved, linking through to the Stock Condition Survey.  RSLs should consider the lifespan of its homes and when these may be decommissioned, demolished or disposed of.
• the business plan must draw on the views of service users to show how core services will be developed and improved.  Where there are plans to diversify into new areas the plan should show the overall impact of this upon the RSL and identify any changes in the risk profile. 
• liquidity, defined as cash and secured readily accessible headroom, is essential in ensuring continuity of operations and should be closely managed to ensure the business can survive and grow effectively. This can be achieved through risk assessment using a range of financial health check indicators linking to the RSLs treasury policy including peak debt, secured and available headroom, debt repayment or expiry of undrawn facilities, closing cash balances, covenant impact and monitoring of key triggers. Appendix 5 of the BPAG sets out a number of questions which may help to assess the financial health of an RSL.

Appropriate Risk Management Strategy

The RSL should be able to demonstrate an understanding of the main risks, the trigger points and the effectiveness of the mitigation strategies which are in place. There should be a comprehensive risk review and the key areas and risks should be explicit as in the following Risk Review table.

Risk Review

• Development. The RSL should demonstrate a clear understanding of the impact of its development program on its financial standing, future cash flows and covenant performance.  The RSL should have a clear understanding of the risks and opportunities that come with new development, and how these can quickly change through time because of the economic cycle. 
• Covenant Compliance. There should be effective systems to monitor covenant compliance and report to the governing body on this at appropriate intervals.
• Pension Affordability. The plan should take account of any pension deficit and the financial projections should include the effects of auto enrolment. Where appropriate the impact of continuing to offer defined benefit schemes should be set out.
• Diversified Activities. Where non-social housing activities are undertaken (through a subsidiary or directly), it should be clear what impact this will have on core activity and tenants. Where the plan is reliant on a contribution from non-core activities, there should be controls in place to carefully monitor and manage any risks. Where non-core activity involves an investment of funds generated through the core business a clear benefit for tenants and other service users should be demonstrated.
• Arrears and Welfare Reform. The progress of the implementation of the welfare reform program should be monitored and its potential impact should be assessed. Business planning assumptions should be adjusted as appropriate. This may include additional resources being targeted on arrears recovery.
• Treasury Management.  Treasury risks should include, albeit not limited to, interest rate risk, liquidity risk, refinancing risk (access to funding should markets close), counterparty risk, access to security, intra-group lending, investment in commercial subsidiaries or commercial joint ventures as well as covenant risk, etc.
• Debt risk.  The RSL should clearly understand the detailed conditions in loan documents and understand the implications the conditions can have in the future.  Risks and obligations when entering into new loan arrangements should be fully understood and based on appropriate financial and legal advice before finalising any facility. RSLs should ensure they fully understand any complex financial instruments and International Swap Derivative Association (ISDA) agreements in place, this including ISDA linked debt arrangements, which permit fixed rates to be undertaken or funding arrangements including derivatives, leases and finance into joint ventures.
• Rents.  The RSL should be able to demonstrate how rent affordability has been considered and how it has determined if rents are affordable now and in the future. 
• Stock.  There should be an active approach to asset management that recognises the current and long-term demand of stock, the physical condition of stock and the suitability of stock for investment.
• Insolvency.  The RSL should fully understand the demands on its cash flows as this is critical to its business.  Whilst the precise timing of some events cannot be ascertained, the adoption of financial health check indicators can prove helpful in planning liquidity.  The RSL should be able to demonstrate a clear understanding of the impact any development program has on future cash flows and ensure there are adequate cash reserves throughout the life of the plan.  It is essential that funding is in place before the commencement of any development.
• SHQS & net zero standards. The impact of maintaining SHQS compliance and meeting net zero obligations should be included in the business plan.
• Tenant and resident safety. The RSL should have a clear understanding of its statutory requirements in respect of tenant and resident safety and of maintaining compliance with all aspects of these requirements.
• Business Continuity.  Each RSL should have an awareness of what could break the business and what mitigating strategies are required to manage this. There should be a Business Continuity Planning exercises carried out to test the plans.

4.5    Regulatory Standard 5

The actions taken by the governing body and staff determine how the RSL will be perceived by stakeholders.

Regulatory Standard 5

“The RSL conducts its affairs with honesty and integrity”.

Compliance with this Standard in business planning should ensure the business plan underpins the whole business and through the actions of the governing body and staff, upholds the good reputation of the RSL and the sector.

The Scottish Federation of Housing Associations (SFHA) has published a Model Code of Conduct and Model Policy on Entitlements, Payments and Benefits. These codes have been endorsed by SHR. So where an RSL adopts and applies the SFHA’s Models it can have confidence that it complies with the Standards. An RSL can choose a different approach provided it complies with the Standards.

4.6    Regulatory Standard 6

The people on the governing body, and the skills and knowledge they collectively have, are the most significant contributors to good governance.

Regulatory Standard 6

“The governing body and senior officers have the skills and knowledge they need to be effective.”

Compliance with this Standard in the business planning process should ensure that:

• the governing body and senior management are engaged and supportive of business and financial planning.
• the governing body has the appropriate mix of skills, experience and objectivity to enable effective strategic decision making.
• The governing body keeps abreast of latest developments and sector finance risks through regular updates and training provided through both internal and external sources, such as from treasury advisors.  RSLs will also need to provide governing body members with updates and training in other non-finance areas given the broad reach and strategic nature of the business plan, and the other responsibilities that governing body members have.
• the governing body will be sufficiently self-aware of its collective skills and experience to recognise where there are gaps and to make good any gaps with specialist external advice and support, or where appropriate, training and development activities.
• there is a good understanding of the business plan and financial model and overall control is with the governing body and senior team – not one person (eg the Financial Director), and not externally (range of consultants).
• there is a joined-up and evidence-based approach to assumption setting across the RSL (asset management, service delivery, development, diversification, financial control) and between executives and non-executives. 
• there are clear key business planning financial performance indicators, business risk stress factors and clear links between the business vision and strategy. 
• there is appropriate and effective internal constructive challenge and external appraisal.

4.7    Regulatory Standard 7

The governing body discusses and scrutinises any proposal for organisational change and ensures that the proposal will benefit current and future tenants.

Regulatory Standard 7

“The governing body discusses and scrutinises any proposal for organisational change and ensures that the proposal will benefit current and future tenants”.

Compliance with this Standard in the business planning process should ensure that:

• governance structures are as simple as possible, clear and allow it to meet the Standards of Governance and Financial Management, Constitutional Requirements, and Group Structures guidance.
• the RSL ensures adequate consultation with, and support from, key stakeholders including tenants, members, funders (who may need to give specific approval) and local authorities as well as other regulators.
• the governing body is satisfied that the new (or changed) organisation will be financially viable, efficient and will provide good outcomes for tenants.
• the RSL establishes robust monitoring systems to ensure that delivery of the objective of the change and of commitments made to tenants are achieved (for example in relation to service standards, operating costs and investment levels).
• charitable RSLs seek consent/notify OSCR of changes to their constitution and other changes as appropriate.
• the governing body ensures that disposals, acquisitions and investments fit with the RSL’s objectives and business plan, and that its strategy is sustainable. It considers these taking account of appropriate professional advice and value for money - whether as part of a broader strategy or on a case-by-case basis.
• the RSL complies with statutory obligations on tenant consultation, ballots and authorisation.
• the RSL notifies the Regulator of disposals in accordance with regulatory guidance.
• the RSL only agrees fixed or floating charges where the assets are used to support core activities. This should exclude providing security in relation to staff pensions.

Appendix 1 - Business Planning Cycle

It is for each RSL to develop its own business planning processes to suit its particular circumstances. Practices will vary in relation to matters such as the annual rent setting review and reporting to lenders.  The BPAG does not therefore attempt to set out a standard approach.

There are though certain common practices which some RSLs have found useful in developing a robust approach to business planning.

Rolling Programme

Some RSLs have developed a rolling programme to accommodate different activities happening on different timelines as follows:

• every 3 years - there is a comprehensive update of the strategic direction of the RSL;
• annually – the business plan is updated;
• quarterly – progress with operational plans is reported; and
• monthly – performance status reports and management accounts are presented.

It may be necessary to refresh areas within the business plan from time to time where there are significant external or internal events that mean a material change in the strategic context or operation of the business.  Or if the RSL wishes to change its strategic approach. RSLs need to ensure that their plans are devised in such a way that they can be updated quickly should there be a ‘shock’ to the operating environment, or to reflect changes to the development programme, diversification or the impact of changes in the funding markets.  Therefore, aiding understanding of the impact on the financial and business plan within a short period.

Project Plan

In some cases a project plan has been developed to allow planning and monitoring to be undertaken continuously. This can help to allocate tasks throughout the year thus avoiding problems associated with carrying out one big exercise every year. This also ensures that time is set aside during the year with governing body members and staff to support future planning.

A broad outline of a business planning process is provided on the following page.  This illustration is indicative only.

Appendix 2 - Strategic Options Appraisal

Each RSL has to make important decisions about how it conducts its business and the impact it aims to have on an area or community.  As part of effective business planning, each RSL needs to consider how it will use its resources to meet a range of competing demands in terms of services, neighbourhood management, stock quality, regeneration, new development and demolition.

Options appraisal is a technique for considering strategic alternatives and analysing their relative costs and benefits against a pre agreed range of criteria.  It can be used when considering the future of the organisation as part of business planning or alternatively used as a tool to consider strategic investment decisions.  An RSL should undertake an options appraisal when its senior officer leaves the organisation where it does not have an up-to-date business plan to guide its decisions.  This options appraisal can be specific and self-contained, or it can be undertaken as part of a broader business plan update.   Option appraisal, if conducted properly, facilitates improved decision making and helps develop VFM solutions that meet strategic objectives.

The following diagram summarises a basic options appraisal process. 

The basics shown here can be applied proportionately to strategic options and strategic projects that require appraisal.  Options appraisal is distinct from sensitivity analysis which tests the movements and impact of changes in key variables (for example interest rates or rent levels) which impact upon the business plan. 

The business plan which is approved by the governing body should reflect the RSL’s chosen strategic direction. Where alternatives are being explored these should feed into the business planning process. Supporting information should be available to evidence the range of options appraised.  This should include strategic options appraisal reports where necessary to support the selection of the preferred option.  In these cases, it would be good practice to note in the business plan that the chosen direction was determined following an options appraisal.

The options appraisal process should itself incorporate stress testing that reflects the pressures, changes and risks that the RSL is likely to face.  Consideration should be given to the financial impact, particularly on lenders’ covenants and the terms of lending agreements.  If breaches are identified under certain scenarios or sensitivities the RSL should be clear on the associated probability and how any breach would be dealt with.

Further guidance on reflecting options appraisal principles and practice is contained in other guidance produced from sector representative bodies.

Appendix 3 - Environmental Analysis

RSLs need to be aware of how the economic climate can impact upon the business plan.

PEST and SWOT analyses can be useful tools in assessing the impact of economic changes.  The process should be reconsidered as the dynamics of the environment change.  Some of these key changes might include:

The business planning process should consider the operating environment (drawing on the environmental analysis conducted).  It should also examine how to respond to meet housing need, the expectations of current and future residents and changes in demand for housing and related services.  Typically, this will be done separately for each key area of business activity.

A separate and proportionate environmental analysis should be undertaken for each main business activity while recognising the inter-connections (for example rent affordability, investment obligations and cost of living challenges).  The nature and depth of the analysis will differ, depending on whether:

• the activities are new or existing;
• there are inherent risks associated with those activities; and
• the resources and infrastructure exist to support the activities without compromising other critical elements of the business.

Appendix 4 - Financial Planning Model

A robust financial model has certain characteristics:

• 30-year long term modelling, 5-year medium term modelling, and annual detailed budgeting;
• consistent, internal logic and mathematical accuracy;
• logical inter-relation of elements. For example, statement of comprehensive income, statement of financial position and statement of cashflows;
• The model should not be so complex that it can only be operated by a very few highly technical users. However, it should be sufficiently detailed and able to analyse the contribution of different key activities;
• it should clearly distinguish between inputs, workings and outputs;
• it should be transparent with underlying assumptions and dependencies clear;
• assumptions and relationships between worksheets should be set up so that inputs can be easily changed and to give sufficient flexibility to test different variables and scenarios; and
• the RSL should own and understand the model even if it was prepared by external advisors.

Where complex systems have been developed it is important to ensure that there is appropriate documentation to allow staff not directly involved to understand the processes and how they operate.  This documentation is also important for auditors.  Steps should be taken to ensure that all of the knowledge required to operate the system and to understand the outputs does not reside with a single member of staff.

Models should be validated from time to time.

Appendix 5 - Financial Health Check

The following checklist of key questions should help determine if the business plan is fundable and sustainable in the short, medium and longer term.  This list is not exhaustive.

• Financial Viability
  • Is the baseline plan sustainable in the short, medium & long term?
  • Are there adequate levels of liquidity (cash and secured and available loan headroom) throughout the life of the plan?
  • Are the key assumptions reasonable based on the RSL’s operations and the wider economic environment?
  • Are the tightest financial covenants and key metrics reflected correctly within plan?

• Rent Affordability
  • Can the level of income generated support the business activities and investment obligations?
  • Are rents affordable now and in the future and what impact will rent levels have on arrears in the future?
  • Are rent levels linked to the delivery of tenants’ needs and to the provision of services tenants want?

• Debt Affordability
  • Can borrowing be serviced now and in the future?
  • Is the borrowing available, affordable, sustainable and are assumptions prudent?
  • Are the refinancing requirements and exposure to interest rates clearly understood and linked to your Treasury Strategy/Policy?
  • Are the expiry dates of available funding not yet drawn or expected to be drawn clearly understood?
  • Are there sufficient unencumbered or over secured assets to support future funding?

• Investment
  • Are there sufficient levels of investment in the stock?
  • Is there an integrated approach to asset management?
  • Is there an anticipated investment in intra-group or joint ventures that need to be considered?

• Development
  • Is development underway or planned?
  • Is growth through new developments affordable and good value for money? What funding models are in place or what are the funding options?
  • How will development impact the RSL’s financial projections in the short, medium and long terms?
  • Does the RSL understand the risks and opportunities that development can bring to the business?
  • Does the RSL have the capacity to undertake development, or should it consider a partner(s)?

• Service Delivery
  • Can service delivery be maintained at required levels?
  • How does the RSL compare to its peers?
  • Does this plan provide good quality homes and tenant safety?

• Performance & Efficiency Review
  • What aspects of the business work well?
  • How does the RSL compare to its peers?
  • Compliance with consumer standards
  • Demonstrate effective use of RSL’s assets and resources

Appendix 6 - Glossary