Trustee boards should think carefully about how to secure income to cover the costs of running their charity and funding its work. It’s important to make sure that income is from a range of sources.
Trustees are also responsible for making sure funds are secured ethically, legally and in a way that supports the charity’s values.
- How stable and predictable is our income?
- Are we dependent on a small number of income sources?
- What other risks are there to our income?
- How do we track our different income sources?
- How much of our income is restricted? This means you’re only able to spend it on certain things.
- Where we have restricted income, does it contribute to the costs of running the charity?
- How much do we spend on generating income? Is it a good return on investment?
- Is our approach to raising money ethical? Does it support the charity’s values?
- Have we followed compliance rules and codes of practice?
- Are we open and transparent about our approach? Do people know how to make a complaint?
A charity’s board needs to oversee all sources of funding. Some common sources include the following.
Donations come from individuals through fundraising and legacies. They can also come from companies or charitable trusts and foundations.
Most donations can be spent on any work which helps achieve the charity’s purposes, unless the donation has been given for a specific project. This would then be classed as restricted income.
Trustees need to monitor the income from donations. Fundraising also costs money. Trustees should make sure the charity has a good return on investment from fundraising activities.
Board considerations
- Cost and return: It can be expensive to generate funds from individuals. The charity will need to invest in building donor relationships. The board carefully consider and monitor the ratio of investment and return.
- Ethics: The board should agree on an approach to donations that is ethical and true to the charity’s values. This will likely need a donation policy. The policy should cover rules on accepting donations and how fundraising activity is conducted.
For more information on ways to raise money from individuals or companies, read our guidance on fundraising methods.
Grants are usually provided by the public sector or by charitable trusts and foundations. The money doesn’t have to be repaid and is usually exempt from tax.
Board considerations
- Charitable purpose and status: Trustees need to be clear on how a grant is helping the charity achieve its purpose.
- Conditions and expectations: Grants almost always come with conditions. They are often awarded for specific projects and have expectations of outputs or outcomes. Make sure you read any eligibility criteria thoroughly. For example:
- the charity may need to achieve agreed milestones to receive the funding
- the grant funder may only fund organisations with charitable status
- the charity may need to match the grant with funds from other sources.
- Operations: Fulfilling the grant conditions may impact the charity’s capacity to deliver other work.
- Reporting: Most grants will come with some reporting expectations. Larger grants often expect the charity to provide impact evaluation. Trustees should make sure their charity can meet these expectations before agreeing to the grant.
- Time limits: Grant funding is usually for a limited period. Trustees must consider how the charity can continue to offer support and be sustainable after the funding ends.
A contract is a form of trading where there’s a formal agreement between two parties. It means each party has agreed to do something. If either of them fails to do it they’re covered by:
- the terms of the contract
- contract law.
Contracts come with the same considerations as grants. They also have some extra considerations.
Board considerations
- Tax: The charity may have to pay tax and VAT on income from a contract.
- Terms of the contract: Trustees must be sure the charity can fulfil the terms of the contract. They may also need to provide evidence they've fulfilled the terms. Trustees should also consider the risks of not fulfilling the contract and how this might impact the charity.
- Full cost recovery: Trustees must make sure the contract income covers the true costs of delivery. If possible, contracts should also contribute to the cost of running the charity.
Many charities earn income by selling goods and services. They may sell these to:
- members
- service users
- the general public
- other organisations.
Some charities earn all their income this way.
Board considerations
As well as the same considerations for grants, boards should also consider the following.
Charitable purpose and tax rules
The ability of charities to trade is limited. A charity can trade if the trading activity directly furthers its charitable purposes. This is known as ‘primary purpose trading’.
Charities can be flexible on how they spend earned income. This means they can also benefit from tax relief.
Trustees should seek specialist advice if trading activity doesn’t directly support a charity’s purpose and becomes a significant part of the charity’s income. There are implications for both charity and tax law. A common way of managing this scenario is to set up a separate trading company.
Cost and return
Like with fundraising, trustees must weigh up the cost of trading versus the income it generates.
Boards need to make sure the charity does not subsidise trading which doesn’t make a reasonable income. Especially where these activities don’t support the purpose of the charity.
Read our guidance on trading and charities.
All charities can invest, as long as their legal structure and governing document allow it.
Investments can be a source of flexible income. But the charity must have enough capital for investment to be a sustainable strategy.
Trustees need to manage investments closely to help maximise returns. For example, if capital is in the form of an endowment there can be restrictions on how it's invested and spent.
You should always seek professional advice before making charity investments. This is a legal requirement unless there is good reason not to. For example, if the trustees have enough investing experience.
Board considerations
- Powers to invest: It's important to check your charity’s governing document before investing. This will help you understand what investment decisions the board are allowed to make.
- Risk and reward: Investments can go up and down. The board should carefully consider how risky investments are and decide how best to manage the risk.
- Delegated decision-making: Boards should set clear parameters when delegating investment decisions to a subcommittee or individual.
- Investment policy: Trustees should set the charity's investment approach and objectives. This can include key objectives, a framework for where to invest, and guidance on the level of risk.
- Professional advice: Charities investing significant funds will often appoint a fund manager. The fund manager will oversee the investment and be accountable to the board. They may also seek other forms of professional advice.
- Ethics and values: The board must monitor and agree on an investment approach. The approach must be ethical, and investment decisions must support the charity's purpose and align with its values.
The Charity Commission has guidance to support trustees with investments.
A loan is a borrowed sum of money that has to be paid back, usually with interest. Loans are flexible and can be quicker and easier to secure than other forms of funding.
You may need to provide assets as security for the loan. They will almost always come with interest payments. Charities with a track record and evidence of operations will likely find it easier to secure loans.
Board considerations
- Powers: It’s important to check your charity’s governing document before exploring loan financing. Not all governing documents allow trustees to take loans or other financing options. Some governing documents don’t allow trustees to use the charity’s assets as securities for loans.
- Repayments and interest: Trustees must consider if a loan is in the charity's best interest. Most loans come with interest and will cost the charity money in the longer term. It may be worth exploring other options first. Trustees must be confident that the charity can afford the repayments without negatively impacting their work.
- Risk: Trustees need to factor in the risk of their plans not working against the cost of the loan.
- The lender: Trustees should make sure the charity borrows from a reputable lender. They should identify and manage any conflicts of interest. Along with considering the rate of interest, the board should also apply ethical tests to how the lender does business.
Voluntary sector loan providers
Fundraising comes with its own set of rules and expectations. Boards need to make sure their charity complies with fundraising regulations.
