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Charity Trustees’ Responsibilities – A review of key areas following Kids Company – Part 2

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Forecasting

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.

Charity Trustees’ responsibilities – A review of key areas following Kids Company – Part 1

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The failing of a charity with the public profile and popularity of Kids Company came as a shock to both the sector and the wider public, and has prompted much to be written about the lessons that can be learned from these events, including a report by the Public Administration and Constitutional Affairs Committee.

But in many ways there aren’t any new lessons to learn – these lessons are more of a reminder to trustees about the need for good governance and financial management. After all, the legal responsibilities of trustees are not new – they are long established in law and explained in Charity Commission in their guidance notes.

charity asking questions

So let’s look at some of the key financial management and governance matters of which trustees (and CEOs and FDs) should be aware:

1. Financial Management – don’t shun responsibility

Don’t forget the financial management side of running a charity, or think that this responsibility lies with the treasurer, financial controller, bookkeeper, professional advisor, etc.

As trustees you are ultimately responsible and may (in certain circumstances) be personally financially liable – so make sure you are happy that the organisation is being managed well and you are getting the information you require to monitor performance. This information should be complete to the extent that you are able to gain an understanding on the financial position of the charity, but not so detailed that you cannot see the wood for the trees and you get bogged down in the detail. By no means an exhaustive list, but consider the need for full management accounts, variance analysis, KPIs, forecasts, scenario planning (for example if some future funding is uncertain), etc.

If you don’t feel you getting answers to your questions, keep asking them!

2. What are your charitable objectives?

The world is an ever changing place and the needs of your beneficiaries may also change. Or you may find resources are more readily available for funding different types of projects. Mission creep can take hold perhaps without noticing.

But a charity’s resources should be spent on meeting its charitable aims as set out in its governing document. Are you happy that expenditure is being incurred on meeting the organisation’s objectives and are there controls to ensure this? For example:

  • Are fully budgeted projects approved by management and trustees before activities are carried out?
  • Is all expenditure approved by management to ensure in line with objectives, strategy, and the approved projects?

In other words, making sure that resources are spent as planned and not on an ad-hoc basis.

3. Systems, Procedures, and Controls

Fully documented systems, procedures, and controls should be in place. These should be communicated to all staff, and subject to regular review.

Ensure that they are meaningful and relevant to the charity – if all income is received under contract, is there a need for systems and controls over cash donations?

It is also worth considering whether annual external audit review of controls is sufficient – or whether an internal audit would provide wider ranging coverage and more immediate feedback of the charity’s activities.

The above suggestions are by no means exhaustive and not necessarily the best approach for each charity. Making sure the processes are specific to your own organisation and reflective of its specific needs and circumstances are essential. In my next blog, I will look at more financial specific matters including budgeting, reserves levels, and cash management.