Running a charity – the basics
Charities are not-for-profit organisations, and they don’t have any shareholders. This means that there are no owners who expect to collect dividends, so any surplus money is retained within the charity and either used operationally or put aside as a reserve.
When it comes to financial management, there are a few key similarities between for-profit and not-for-profit organisations. As in the corporate world, you must be able to vouch for all your income and expenditure, produce accounts and reports in a timely fashion, monitor your cashflow and prevent financial crime.
Your tax status will be different, but your approach to running a not-for-profit must be just as focused as it would be if you were running a limited company.
On top of that, there are also a number of specific measures and processes that charities need to follow.
What information do you have to submit?
The complexity of the law surrounding charities can seem like a legislative minefield. Although there are some basics that apply to all charities, the documents you need to file each year depend on a variety of factors, including how your charity is incorporated and your income.
Regardless of your size and turnover, though, you must maintain accurate records and file accounts each year and on time. Records – including Gift Aid details – should be kept for at least six years, or three years in the case of charitable companies. Different charity types must choose a suitable legal structure, ensuring it is subject to the Companies Act and other legal obligations. However, it doesn’t have shareholders and must always act in the best interests of its charitable mission.
All charities with annual income of more than £10,000, and all charitable incorporated organisations regardless of income, must submit annual returns. (Charitable incorporated organisations are registered with the Charity Commission but enjoy limited liability without the need to register at Companies House.) Registered charities with less than £10,000 income need to submit annual update forms.
You might have to produce trustees’ reports as well, unless you are exempt.
Keeping proper records
All this makes it crucial that you have established processes in place to manage your finances.
Having strong financial management is as important in a charity as it is in any other organisation. In some ways it is even more so: public trust in a charity can easily disappear if it is found to have lax financial controls or is caught up – however unwittingly – in tax evasion or money-laundering by third parties.
Charities, by their very nature, are built on trust. Funding comes from benefactors and supporters who hand over their money without expecting any goods or services in return – they rely on the charity to look after and spend that money wisely.
As a result, there is an expectation that charities are more accountable to the public than for-profit companies are. There is less ability to hide things under the guise of ‘commercial sensitivity’, for example. Full and frank disclosure is both required and best practice.
Statement of Recommended Practice
The Charities Statement of Recommended Practice (SORP) provides guidance for managing accounts and financial reporting.
It explains how charities should provide full details of income and expenditure, and how all financial activity and the source of the charity’s income must be disclosed.
Trustees’ annual reports
A trustees’ annual report is "a concise but comprehensive review of the activities of the charity prepared by the trustees for each accounting year".
If your charity is required to submit an annual trustees’ report (most charities are, but some are exempt), don’t outsource the responsibility to a third party.
The idea is not for someone else to draft the words and the trustees simply sign them off. Some of them might be heavily involved in the work of the charity during the course of the year, but others will take more of a backseat role and might not be fully up to speed with all aspects of the organisation.
Requiring them all to be involved throughout the process of drawing up the trustees’ report helps give them clarity, flags up any problems and acts as a check on possible fraud.
It also leads to best practice throughout the organisation. If the trustees make it clear what information they will require on an ongoing basis for these reports, it can help provide focus across different areas of the charity.
Protecting yourself
Unfortunately, charities and other not-for-profits can make attractive targets for criminals, who can try to use them for money-laundering or tax evasion.
Because of this, you can expect to be under the regulatory spotlight, and you need to be able to prove that things are in order.
That’s another reason why rigorous financial management is vital. In the event of the authorities asking to see your financial records, properly presented information can quickly prove that everything is above board.
You also need to have a handle on your data and mustn’t break data protection laws.
Many charities need to hold confidential data, and this data can often relate to particularly sensitive issues and vulnerable people. Data security is important in any organisation, but it’s perhaps even more crucial in the charity sector.
Make sure you have a watertight data protection policy in place that complies at the very least with the General Data Protection Regulation (GDPR), as well as with legislation in any other jurisdictions where your organisation operates. Ensure that everyone within the charity understands the requirements surrounding data protection.
Use the right financial management software
Getting the right IT system in place can make life a lot easier. It helps with budgeting and producing reports, and allows you to check your financial position in real time.
But don’t assume that off-the-shelf software will do the job for you. Although the basics of accounting are the same as with for-profit organisations – keeping tabs on cashflow, invoices, payments and so on – the specific accounting rules for charities mean that you should have an IT system designed for your organisation's explicit needs.
Even then, the different regulations and the SORP guidance mean that your requirements will vary depending on the size of the charity, how it is incorporated and whether you have operations overseas -- another reason to make sure you have a system that is tailored to your specific situation.
Ongoing training is essential
The complexity of accounting standards for charities and the continual updating of the regulations means you should regularly check that you are up to date with the law. Draw up a comprehensive training programme so that time is put aside for refresher courses and for learning about any new obligations that your finance team and your trustees might have.
Like what you’ve seen? Check out our latest financial management blogs to discover more helpful insights.