Charity finance
This resource is for voluntary and community groups who are just starting out, and those who have been running for longer but now need to expand or to employ someone for the first time. It covers the basics as well as guidance on more advanced charity accounting, giving links to further information for areas that you might need more specialist infomration on.
Finance is one of the most important areas to get right, so if you need additional support please contact THCVS.
THE BASICS
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- Your group will need a bank account if you handle money. UK Finance has put together some questions to help you decide what your banking needs are, and provides a list of bank accounts that might be suitable for voluntary and community groups. There should be two signatories to authorise payments on the bank account, and they must not be related or living in the same household. The Charity Finance Group gives much more information about charity banking here: Charity Finance Group | Banking for Small Charities.
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You must set up financial controls to ensure you meet your legal duties, protect your assets and make informed decisions about your financial position.
These financial controls should cover:
- All aspects of how your charity handles its resources and assets, including its money.
- How you store personal data in line with the UK General Data Protection Regulation (GDPR).
The financial controls should include how expenditure is authorised and how you check what money has gone in and out of the bank.
You should also set a budget at the beginning of the financial year, setting out your expected income and expenditure. Trustees should approve this as they have overall responsibility for finance. Management accounts are updates on the financial position, which can be run quarterly or monthly. They show how well you are doing against the budget and set out the reason for any differences.
You should set out how you buy things (e.g. making sure you get several quotations to ensure good value for money), separation of duties when purchasing and approving payments, management of cash/credit cards/ cheques/online banking, as well as setting out procedures for claiming expenses. UK charities must follow the same anti money laundering regulations as businesses.
The Charity Commission gives more information about fnancial controls here including a financial controls checklist.
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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
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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:
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The Charity Commission defines a risk as ‘anything that could, if it happened, affect your charity achieving its purposes or carrying out its plans’. It notes that trustees ‘have a duty to avoid exposing your charity to undue risk’.
Risk management is the process of identifying and assessing risks and deciding how to deal with them.
The Charity Commission says this should consist of the following steps:
1. Establish a risk policy.
2. Identify risks (what could go wrong, including governance, operational, financial and external risks as well as compliance with the law and legislation).
3. Assess risks (how likely is it, and how serious would it be).
4. Evaluate what action to take (e.g. avoid it, transfer it, insure against it, accept it).
5. Review, monitor and assess periodically.
Full information from the Charity Commission can be found here: Charities and risk management (CC26) (publishing. service.gov.uk).
The Charity Governance code also talks about the importance of good risk management.
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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
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Annual accounts and return
All registered organisations must submit an annual report to the Charity Commission or CIC Regulator. Full details of how to do this are given here: Charity reporting and accounting: the essentials November 2016 (CC15d) - GOV.UK and here: CIC34: community interest company report - GOV.UK.
Audit and independent examination
All charitable incorporated organisations (whatever their income) and registered charities with an income greater than £25,000 must file their accounts and an annual report with the Charity Commission. The Charity Commission has a detailed guide to charity reporting and accounting.
If your annual income is less than £25,000 you do not usually need any form of examination or audit of your accounts. If your income is over £25,000 but under £1m you will need to get an independent examiner (‘IE’). If your income is over £1m (or more than £250,000 and with gross assets of more than £3.26 million) you will need your accounts to be audited.
Audit and independent examination resources
As your organisation grows, so do your responsibilities.
When you get to a certain income you must consider:
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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.
The role of trustees
Trustees are responsible for understanding and overseeing a charity’s finances and making sure they are managed responsibly. The Charity Commission says that trustees must:
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- Make sure the charity’s assets are only used to support or carry out its purposes.
- Not take inappropriate risks with the charity’s assets or reputation.
- Not over-commit the charity.
- Take special care when investing or borrowing.
- Comply with any restrictions on spending funds.
The Charity Commission has produced a series of 5 minute guides for trustees on a range of topics, including finances.
All charities must keep proper financial records and prepare annual accounts. Trustees must arrange for accounting books and records (including cash books, invoices and receipts) to be kept for a specified period. You can read more about that here: Retention of Accounting Records.
The role of the treasurer
Whilst all trustees are responsible for a charity’s finances, it is the treasurer that takes the lead at board level on:
- Making sure the charity keeps proper accounts.
- Reviewing the charity’s financial performance.
- Drawing up or reviewing policies for finance and investment.
- Ensuring that the charity has robust and effective financial controls in place.
- Liaising with finance staff and with the charity’s independent examiner or auditor.
- Reporting on financial matters. In larger charities the treasurer may share these responsibilities with a finance committee, and staff may carry out day to day finance functions.
To obtain a volunteer to serve as treasurer you could contact the Volunteer Centre Tower Hamlets or take part in the East London Business Alliance’s (ELBA) Board Match programme. You can find an example of a treasurer job description from Reach Volunteering here: Download a sample Treasurer role description.
Other resources
Training and further resources
If you have any questions about any of the information in this resource, THCVS can give 1-1 support and advice. Please email us at info@thcvs.org.uk.