Ten tips for smaller charities on their financial management, accounting and governance
Charity accounting is an increasingly specialised activity, and one which is under increased scrutiny today. Charities Panel member Jim Gibson shares his experience as a charity trustee and charity accountancy adviser of some key issues which smaller charities and their independent examiners should keep front of mind. These may seem all too familiar, but are nonetheless worthy of highlighting. Charity staff often change, and it is amazing how frequently issues reoccur.
1. Trustees’ annual reports
Less is more. Have you ever looked at your Trustees’ annual report as if you have come at it completely cold? Does it tell a full and coherent story, avoiding the temptation to ‘boiler plate’ last year’s report? How long is the report? I have seen reports running to 10 pages detailing every single event which the charity has organised. True, there are things which need to be covered, but not every detail should be included.
Make sensible use of paragraph headings or bullet points. Keep it simple: outline what the charity has set out to do, how well it has done it (successes and failures), and what it plans to do next year, and ensure all mandatory reporting requirements are met.
2. Management accounts
Put effort into producing reliable management accounts and don’t leave all the reconciliation work to the year end. In any case, funders often require management accounts, or at least confidence that they are being prepared timeously. Some will require detailed reports, which in turn will need to be produced on a reliable and robust computer-based accounts package.
Reconcile the bank monthly. Reconcile the creditors ledger and sort out those negative balances; utility companies are the worst. They alter direct debits but the invoices do not appear, become lost in the ether, disappear under a pile of paper on a desk at a branch office, or are never checked for accuracy. Yes, time from suitably qualified staff is required for this, but it is a false economy to skimp on the administration.
3. Beware ‘spreadsheetitis’
Spreadsheets are undoubtedly useful, but they can be confusing, sometimes maliciously so. It is best if the figures are drawn from the accounting system rather than being the accounting system. Layout is important; a Board will prefer to see the salient features on one page maximum. What do all the figures actually mean? Is there a clear statement of assumptions and how reliable are the assumptions?
4. Board diversity
How diverse is the board? Funders are paying increasing attention to this, as is OSCR and the other UK charity regulators. It is necessary to ensure both the quality and diversity of trustees. Gender, age and skills mix are all important.
A skills matrix is a good idea when recruiting or selecting board members. It can sometimes be difficult to obtain a good balance of skills, especially when the charity is a membership body with board members elected solely from the wider membership. In such circumstances, is there a place for co-option onto the board in order to bring particular expertise?
Are the trustees fully engaged in the work of the charity, or are they there just to be seen to be doing charitable work?
5. Succession planning
How long have the trustees been on the board? Does the constitution allow them to stay on permanently or is some rotation required, thus forcing trustees to look for new blood? What is an appropriate term of service; for example, two two-year terms might be too short, but two five-year terms might be too long. A greater element of forward planning is likely to be needed to find recruits to key positions such as chair or treasurer.
6. If all else fails, read the instructions
What does the constitution say about the number of trustees, their terms of office or the need for an audit (when sometimes the charity could be eligible for an independent examination)? And what about meetings, AGMs and notice periods? When do accounts need to be sent out for approval? What about the role of the finance committee, signing authorities for cheques, especially if a signatory is about to retire (do it in plenty of time, some banks are better than others).
Does the constitution reflect what is actually happening in practice; if not, is a major overhaul required in order to make it fit for purpose in 2020? Are the charity’s minutes produced timeously, with clarity on decisions reached and action points?
7. Keep up to date with OSCR
Trustees need to be fully aware of and up to speed with OSCR guidance; for example, on notifiable events, especially if the charity has overseas interests.
8. Over or under the threshold - not always so simple
If a charity draws up its accounts on the receipts and payments basis, a problem can arise with the sale of a building or receipt of a large legacy, as the charity may need to switch to the accruals basis (receipts of £250,000 or more) or be subject to an audit (income of £500,000 or more for Scottish charities), involving restatement of the prior year accounts and/or the appointment of an auditor instead of an independent examiner.
9. Keep on top of restricted funds
Check the source document or application form to verify whether a donation is restricted. Make sure that the documentation for restricted funds is kept for future reference, as it can be difficult to go back into history to find out.
Be careful when receiving a restricted gift to make sure that you are not storing up a problem for your successors. For example, creating a large restricted fund which cannot be used other than for pianos or stained glass when there is an urgent need for general unrestricted funds. Sometimes it is possible to reassign funds to unrestricted funds with the agreement of the donor.
Keep a clear separation between restricted funds and unrestricted funds, as restricted funds cannot be used to bail out deficits on unrestricted funds. If this happens the charity’s ability to continue as a going concern may be called into question.
10. Gift Aid and the Gift Aid Small Donations Scheme
Is the charity up to speed with the regulations? Are there Gift Aid declarations in place? Are they maximising the use of the Small Donations Scheme? Are claims made regularly and records retained for seven years?