What's different about charity finance

In many ways it is not that different in terms of day to day operations. Size and complexity of organisation makes a far bigger difference than sector when it comes to management information, and essentially, everyone needs to know:

• what money is coming in and where from
• what money is going out and where to
• how does that fit with our plans?

Charities are expected to apply proper accounting principles like any other organisation. If you think your charity is doing something that goes against these, it is always worth asking for an explanation, rather than just assuming that it’s because things are different in the charity world.

The regulatory and reporting regimes are different, so the annual accounts of charities look different from those of ordinary companies.

Small (income less than £250,000) non-company charities can report on a cash basis.

Larger organisations don’t have a Profit and Loss Account to show what has happened in the year, they have a Statement of Financial Activities – see SORP 2015 Made Simple – Sayer Vincent. 

More on statutory reporting.

A big difference for charities is in how you account for your funding. Charity funds fall into two broad categories: restricted and unrestricted.

Restricted funds

Restricted Funds are where the restriction is defined by the donor.

If a donor gives money to your charity in a way that specifies how that should be spent – as part of an appeal for a new building, or as a grant to pay for a project – you are duty bound to spend it for that purpose. You shouldn’t even borrow it to use for another project, because it isn’t at your disposal. 

This means you need to be careful when you are putting together an appeal and word it so that you don’t tie money up in a restricted fund unnecessarily. The Chartered Institute of Fundraising has advice on this.

This also has implications for your accounting set up because you have to be able to identify all the money that has come in and been spent on a particular restricted purpose – and to be able to group all the restricted funds together for reporting at year end. It is a similar idea to project accounting, except that you don’t have discretion over taking money in and out of a restricted pot as you would an ordinary project.

Endowment funds

Restricted endowment funds are less common. Charities are required under trust law to invest the assets of an endowment, or retain them for the charity’s use rather than to spend them. You can spend the income.

Unrestricted funds

General funds

This is money that you have at your disposal to spend on your charitable objects at your discretion. It is an unspoken assumption that this is what people are aiming to build up because it gives you most freedom to pursue your aims without external interference.

Designated funds

Designated funds are earmarked formally by the trustees for a particular purpose and can be formally undesignated and go back into the general fund.

The reserves policy and guidance looks at how and why you might build different reserves within your general and designated funds.

WYCAS give more detail on the principles and practicalities of Fund Accounting.

the Chartered Institute of Fundraising

Among the six key trustee duties, three stand out in relation to finance:

• Act in the interests of their charity and its beneficiaries
• Protect and safeguard the assets of their charity
• Act with reasonable care and skill

All trustees need to have sufficient awareness of the key issues not to be caught unawares – you might not know everything about the finances, and you might get things wrong, but you should have a fair idea of whether you expect to have enough money to deliver your plans, and when the pinch points might come. You can’t leave that all on the treasurer’s shoulders – they will know about the numbers, but may not understand what the charity does as well as you do. 

The incentive for getting interested is that when you have a good overall picture of the finances, you are much better placed to determine how to allocate the resources, and engage more readily in the debate.

It takes time to build up the skills and confidence to know what to ask so the Charity Commission has put together 15 questions you should ask including really useful detailed questions you could follow up on.

The Charity Finance Group have a comprehensive document called Essential Charity Finance for Trustees. 

Treasurer's role

All the guidance stresses how important the treasurer’s role is, which is true, but few lead with how interesting and entertaining it can be and what a unique insight you can get into an organisation. As treasurer, along with the member of staff responsible for finance, you often occupy an odd impartial territory. You have to start by setting aside your own views to give objective information to enable the board to have a full debate. 

Although all the trustees have a financial responsibility, in practice they will look to the treasurer to have gone into more detail and alert them to what they need to know. 

The Honorary Treasurer’s Forum summarises the role as:

" to monitor the financial administration of the charity and report to the board of trustees at regular intervals on its state of financial health, in line with best practice, and in compliance with the governing document and legal requirements."

...though it is important to interpret the ‘reporting’ as an active process rather than one where the other trustees merely receive the report.

Treasurer role descriptions

• Honorary Treasurers Forum
• ARVAC – this role description can be easily adapted for very small organisations