Jen Gerrard from Gerrard Consulting takes a closer look at the updated Charity finances: trustee essentials (CC25); in particular, the guidance around financial management for charities from the Charity Commission for England and Wales.
The Charity Commission’s key message from the guidance is that good management of a charity’s finances and other assets enables it to succeed in delivering its charitable aims.
To achieve this, trustees must properly supervise their resources and satisfy themselves that they have:
- realistic funding plans and strategies
- effective management controls and systems
- planned for their charity’s assets and resources to be used in the best possible way for their beneficiaries
The Commission believes that it shows the valuable and visible results of a trustee’s commitment to their charity, beneficiaries and supporters. The Commission also recognises the commitment that this requires of trustees, and the challenges they can face in serving their charities well.
The guidance covers the following three areas:
- Making the most of your finances – sub-divided in to:
- Financial management
- Identifying and managing risk
- Sound internal financial controls
- Charity reserves
- Managing financial difficulties and insolvency
- Income generation – sub-divided in to:
- Financial investment
- Charities and fundraising
- Charities and trading
- Using other resources – sub-divided in to:
- Staff and volunteers
- Charities and insurance
- Buying and selling land
- Trustee expenses and payments
With a gentle reminder of legal duties versus best practise:
What does making the most of your finances mean in practice?
This article reviews making the most of your finances and how you can practically apply some of the recommendations put forward by the Commission.
Practical financial management
I’m a firm believer in all organisations, no matter their size, striving for financial visibility. It underpins all communications with our charity as a matter of course.
Of course, achieving financial visibility through good financial management takes work and (most importantly) buy-in at all levels of an organisation. It’s not enough for the trustees and senior management to fly the flag – all staff need to have an awareness, at some level, of the intrinsic link between their activities and the impact on (and output of) the finance team.
This is especially crucial, for example, in terms of open and clear communications between fundraising and finance teams.
As I’ve said before - in my opinion, sound financial visibility broadly encompasses the following:
- Annual budget, prepared and signed off in advance of the new financial year
- Access to a real-time rolling cash flow forecast, updated regularly
- The ability to produce a funder report showing actual spend versus planned spend instantly – whether that be at the organisational, project, department or fund level
- Ability to monitor and review the organisation’s performance against budget and in line with relevant, pre-determined financial Key Performance Indicators (KPIs)
- Knowing in real time how much you have left on each restricted fund and/ or project
- Sight of your free reserves throughout the year, benchmarked against your Reserves Policy
- SORP-compliant statutory accounts filed nice and early with the Regulator
For a smaller charitable organisation, I might suggest the following as key (read as minimum) ‘best practise’ procedures:
- Management review of financial position
- Funds monitored against reserves policy
- Actual performance monitored against budget
- Bank reconciliation
- Debtors and credit control
- Creditors and cash flow control
Having a good finance system in place can make all the difference in laying your hands on relevant information quickly and easily. Whilst spreadsheets have their place, only the very small organisations can still get away with their use for tracking their finances.
With a suite of cloud accounting tools working seamlessly together, you can achieve all the above – relatively inexpensively - and look forward to making faster, more informed decisions, based on accurate financial management.
Identifying and managing risk
For some organisations, risk management has perhaps been limited to delivering a compliant statement in their Trustees’ Annual Report:
“The trustees have conducted a review of the principal risks and uncertainties which the charity faces. A risk register has been established and is updated at least annually. Where appropriate, policies, systems and procedures have been established to mitigate the risks. These procedures are periodically reviewed to ensure that they continue to meet the needs of the charity.”
However, I have reassuringly seen trustees becoming more engaged with risk registers and hands-on risk management processes over the last few years.
As a minimum, we suggest:
- An annual detailed review of your risk register at Board – with full minutes of the discussion
- The adoption of a traffic light or coding system in your register – e.g. on a scale of 1 to 5 what are both the likelihood of something happening and the potential impact? Balancing impact with likelihood of events is great way to truly understand and manage the risks your organisation is exposed to
- Risk being a standing Board agenda item – even if it’s to say with confidence “nothing to note this month”
- Ensuring all trustees are familiar with the Commission’s CC26 guidance: Charities and risk management
Sound internal financial controls
Internal financial controls are essential checks and procedures that help charity trustees:
- meet their legal duties to safeguard the charity’s assets
- administer the charity’s finances and assets in a way that identifies and manages risk
- ensure the quality of financial reporting, by keeping adequate accounting records and preparing timely and relevant financial information
I particularly like that the Commission have made reference (in their updated CC25) to the following:
- Consider using new technology to simplify record keeping, accounting and transaction processes
- Have access to independent professional advice - the communication between the charity’s trustees, accountant and independent examiner/auditor should be more than an annual exchange of records and information
The Charity Commission’s CC8: Internal Financial Controls For Charities guidance is still the recommended ‘go to’, offering a downloadable self-assessment checklist – get your copy here to benchmark your organisation’s controls and identify areas for improvement.
Trustees and senior management should review their internal financial controls at least annually – particularly with the recent change to the Annual Return, which now specifically references the last time that this review was carried out.
If you’re unsure where to begin, or what level of detail to go to, check with your professional advisers who will be able to help. They will also take an impartial, objective view, which is often useful.
If you haven’t done so already, check out my practical advice around reserves and tips for setting and monitoring a reserves policy from 17 January 2017.
There is of course also the Charity Commission’s CC19: Charity Reserves – Building Resilience guidance, which was (tellingly) updated by them in early 2016 - signalling their focus in this area in the coming months.
Managing financial difficulties and insolvency
This part of CC25 deals with when a charity faces financial difficulties, aiming to help trustees recognise when this point has been reached and what actions they should take to manage any risk to beneficiaries.
Of course, if you are already achieving good financial visibility in your organisation then it becomes easier to be proactive in this area, rather than reacting to financial information which may already be a few weeks out of date. This is highlighted by the Commission’s re-iteration of the following points in relation to trustee information:
- Ensure that they regularly receive and consider robust and up-to-date financial management information to enable them to recognise at an early stage when the charity is facing financial difficulties
- Find out which charity funds are restricted in their use by their donors and which can be used for any of its aims - this is crucial to the proper understanding of the charity’s overall financial position
But what happens if you have financial visibility and the outlook looks a little bleak? The obvious considerations in the first instance are:
- Fundraising strategy
- Cost control measures
However, if neither of the above are proving successful in projecting a sustainable activity model then professional advice should be sought as early as possible to assist the trustees in formulating a plan and considering their options.
Closure is not always the only option – merger and/or collaboration could be a possibility in the right circumstances.
The Commission’s CC12: Managing a charity’s finances: planning, managing difficulties, and insolvency is also a fantastic resource.
Whatever the approach you take in your organisation, one thing is very clear - the Regulator for charities in England and Wales is clear in its message to trustees in their approach to financial risk.
Full and active engagement by board members is expected (in line with trustee duties under charity law and/ or the Companies Act 2006) and their guidance is to be ignored at your peril.