In a recent blog, I started to look at some of the financial management and governance areas and responsibilities that charity trustees need to focus on.  These are not new but their importance has been heightened in light of the collapse of Kids Company.

This blog considers three more key financial areas for trustees:

1. Budgeting and Forecasting

Trustees should ensure that full budgets have been prepared, reviewed, and approved. These should be realistic and based on reasonable assumptions.

Budgets should be monitored and compared to actual performance regularly, which can help to identify as early as possible any potential risks on the horizon. They should also be flexible –  if activities change or certain funding is lost, budgets and forecasts (including cash flow forecasting) should be updated accordingly.

Whilst not limited to the budgeting process, consider your funding mix and whether there is a reliance on one particular source. Have contingency plans been considered if this source disappears, and if so has this been factored into budgets?

2. Cash Management

Cash flow management is essential with both cash balances and future cash needs being monitored. Furthermore, for accounting periods on or after 1 January 2016, larger charities (ie those with income over £500,000) will have to include a cash flow statement in their annual accounts, in accordance with the Charities SORP.

Cash flow forecasting should be carried out and this should reflect the charity’s strategy and budgets, and relate to the planned activities.

Sufficient levels should be maintained to cover any shortfalls if urgent expenditure arises, or funding is received late. As with other budgets, these forecasts may need to incorporate contingency plans or “what if?” scenario planning.

3. Manage reserves

Charities are required to set a reserves policy and monitor the level of reserves held against this policy. An explanation of the charity’s reserves policy must be included within the Trustees’ Annual Report, as required by the Charities SORP, together with details of the level of reserves held and why.

There is a balancing act between holding too high a level of reserves that future donors may be put off, and holding too few reserves that the charity cannot weather a storm.  There is no hard and fast rule – setting the level of reserves requires judgement but should be appropriate to the size and nature of your charity.

For example, a grant making charity with low overheads may not need high levels of reserves that cover many months / years of core expenditure. On the other hand, a charity that is providing important frontline services to vulnerable beneficiaries may need to hold a slightly higher level of reserves to ensure that, in event of a funding cut, they can continue to meet the needs of their beneficiaries in a short-term whilst it sources new funding or adjusts its activities gradually to avoid an instant decline in services.

The reserves policy and the level of reserves should both be reviewed regularly to ensure that the policy is still considered appropriate, and that the actual level of reserves is within the policy.

As with the topics discussed in the first blog in this series, all areas should be considered and planned in accordance with the specific circumstances of your charity – one size doesn’t necessarily fit all.

Please do get in touch with any queries you have about your own charity. In the next blog in the series, I will consider some non-financial governance topics.