FAQ

If you are given money for something specific, you must spend it on that thing. This is known as ‘restricted’ income. Examples of restricted income might be a grant from a trust or foundation, or a donation from someone specifically to spend on a particularly project. Some income (e.g. money earned from ticket sales, or public donations from a sponsored event) can be classed as ‘unrestricted’ income, meaning it can be spent on anything that comes under your charitable objectives. Where the restriction has been defined by the donor, you must be able to prove that any restricted income has been spent on what it was donated for.

You cannot fundraise for something in particular and then spend the money you raise on something else. If your fundraising campaign raises more money than it needs for a specific cause then you must follow Charity Commission rules to identify a new purpose: Charity fundraising appeals: using donations when you’ve raised more than you need. Likewise, if your appeal doesn’t raise enough money you must either return the donations or follow the Charity Commission rules to identify a new purpose: Charity fundraising appeals: using donations when you have not raised enough money or you cannot achieve your appeal purpose.

NCVO gives a simple overview of fund accounting here: What’s different about charity finance | NCVO

Reserves are the part of your unrestricted funds that are freely available to spend on your work. They should not include buildings, land and equipment, social investments or money set aside for future project commitments. In this way reserves is money that is truly available to use if needed. Reserves are kept so you can comply with your legal duties to act in the interests of your organisation and its beneficiaries, to act with reasonable care and skill, to protect and safeguard the assets of your organisation and to ensure that your organisation is accountable.

In practice this means:

• Planning to maintain essential services for beneficiaries.
• Covering the risk of unplanned closure.
• Planning for the risks of unplanned closure on your beneficiaries, staff and volunteers to ensure you can meet your spending commitments and liabilities.

Trustees should decide the level of reserves your organisation needs and develop a reserves policy that sets out the level of reserves and why they are necessary. Having a reserves policy can also reassure creditors that the organisation can meet its financial commitments. Your reserves policy should consider the risks of holding reserves that are either too low (so you do not have enough to cover unplanned closure or cannot maintain essential services for beneficiaries) or too high (which may mean that funders are less likely to fund your work).

Further information can be found from:

• The Charity Finance Group: Charity Finance Group | Small Charities and Reserves.
• The Charity Commission guidance on reserves can be found here: Charity reserves: building resilience - GOV.UK.

Good risk management should not only avoid negative events but also improve decision making and enable your organisation to seize opportunities and innovate. A systematic approach to risk management can help to achieve your mission more effectively by identifying and addressing potential obstacles and uncertainties. Conversely, charities that have had poor risk management have experienced an impact on their reputation, finances and operations.

Categories of risk can include: governance, external, regulation and compliance, operational and financial. Financial risk might cover losing funding, not finding enough funding to carry out key projects, financial processes not being adequate, fraud, loss of key staff and cyber crime.

Guidance on risk management

• Charity Excellence - Financial Planning & Management - Charity Excellence.
• The Charity Commission gives guidance on protecting your organisation from cyber crime: Protect your charity from cyber crime - GOV.UK
• Protect your charity from fraud - GOV.UK.
• The Charity Finance Group also gives guidance on fraud for small charities: Charity Finance Group | Small Charities and Fraud.

When you start employing people then you need to have a basic understanding of employment law. ACAS is a good source of information about employment law, and they have a free telephone helpline for all employers: Contact us | Acas. You must also buy employers liability insurance, which is a legal requirement.

You will need to decide and/or determine whether the people you pay to work for your organisation are self-employed or employees. If you take on staff then you will be responsible for calculating and paying their tax and National Insurance contributions under PAYE (Pay As You Earn). You can find out more information about this here. There are penalties for dealing with tax obligations incorrectly or for paying someone ‘cash in hand’ without properly determining that they are paying their own tax and National Insurance. Many organisations therefore work with accountants and/or payroll providers to help them to manage the process of paying staff. You should always research providers and seek quotations to make sure you get a service that is suitable for your needs.