The function of charity finances
The majority of Scottish charities have managed to prove their resilience over the last decade. There is no let-up, however, in the hurdles they face as they strive towards achieving their charitable objectives.
Charities face increased requirements of beneficiaries; ongoing pressures on fundraising; more legislation including the General Data Protection Regulation; a rise in costs including for compliance with the Scottish Living Wage; and potential rates hikes (for some). And that’s without mentioning Brexit.
Set against this backdrop, it is vital that charities focus on maintaining strong, effective governance structures and regularly review all their costs, including the efficiency and effectiveness of their finance function.
However, it appears that the majority of charities are overspending on inefficient models. This is reducing the effectiveness of their finance function, presenting a perfect storm for the sector’s financial health.
Any charity’s finance function should be focused on a mix of strategy, operational efficiency and transactional processing.
Statistics from RSM’s Funding and Functionality report highlighted that 72% of larger charities and 62% of smaller charities are spending well over 1% of their income - the average corporate sector benchmark - on their finance function.
In addition, 40% of these charities are spending more than 30% of their time on manual transactional processing. Their spend is, therefore, going into processing time rather than investing time in key strategic decision-making.
Almost a third of finance functions are using more than 11 spreadsheets to provide regular financial analysis, which opens the charity up to the risks of unidentified error as well as time-consuming data entry and checking.
In addition, 30% of charities only produce quarterly or termly financial reporting and 4% do so on an annual basis.
So, how do boards satisfy themselves regarding the organisation’s ongoing financial viability, especially as only 56% provide financial projections in their management reporting?
An efficient and effective finance function is absolutely core to running an effective charity. Any finance function should be focused on a mix of strategy, operational efficiency and transactional processing.
A key role of a good board and senior management team is to consider the value for money of their current finance function.
Charities should consider why transactional processing is absorbing so much time and cost and yet often is not providing useful, timely information for governance purposes. This is normally due to a reliance on older technology and a number of manual interventions to reorganise and extract effective reports, or a lack of standardised processes across departments.
Some charities also insist on retaining paper-based documentation and approvals, and with additional pressure on resources, it could be that senior staff do not have the time to step back and consider how they would establish their finance team and systems if they could start from scratch.
As well as the inherent operational and departmental inefficiencies suggested by some of the findings, outdated practices increase the risk profile for charities who become over-reliant on key staff, with older systems requiring a lot of manual intervention and resulting in costly delays in providing useful reports.
While it is vital that charities focus on delivery of charitable objectives and outcomes, a key role of a good board and senior management team is to consider the value for money of their current finance function and look at whether investment in IT or restructuring will save costs in the long run and ensure they have an effective finance function fit for the future.