Charity Accounts: 6 Special Considerations
Charity accounts require a number of special considerations, which other kinds of organisations don’t generally have to worry about. In terms of finances, the third sector is incredibly heavily regulated.
Even an experienced accountant will have trouble adjusting to working with charitable accounts. Non accounting specialists often find this area of running a charity incredibly tricky too.
Today, we’re going to explore the special considerations you’ll need to keep in mind when managing your charity accounts. First though, let’s start with the basics.
What are Charity Accounts?
Charity accounts encompass all aspects of how your organisation manages its finances. In essence, there are three core components to this:
How you acquire funding,
How you spend your money,
How you report this financial information to relevant stakeholders and external bodies.
Of course, this is the same basic principle as any other kind of accounting. So how do charity accounts differ from typical accounting? There are a number of core areas where charity accounting requires unique considerations.
Restrictions on how funding can be secured and allocated,
Regulations relating to fundraising activities,
Special rules around distributing assets where a charity ceases to operate,
Special regulatory bodies and agencies which deal with charity accounts.
While these are the broad things you’ll need to keep in mind, there are more specific, practical steps that charities can take to ensure they are properly meeting their financial obligations.
6 Special Considerations for Charity Accounts
Here are six of the most important special considerations which you’ll need to consider when managing your charity accounts.
1. Financial Reserves
Charities are much more reliant on financial reserves than for-profit companies. A big part of this comes down to the fact that most kinds of charities are limited in the kinds of commercial activities they can engage in.
With a few exceptions, most charities can’t really turn a profit.
This makes managing charitable accounts quite different to running a profit-earning business. It’s not as simple as ensuring that each month’s revenue keeps pace with your outgoings.
As such, it’s important to have a strong financial reserves policy, in order to ensure that you can continue to sustainably deliver projects. This should include how much of a reserve you have in place at all times, as well as how and when this can be spent.
2. Understanding the SORP
The process for auditing charity accounts is also somewhat different from the for-profit sector. One crucial element of this is that the auditing threshold is lower in the third sector than in the private sector.
For charities, the auditing threshold is set at £1 million per annum, rather than £10.2 million for private companies.
Charity accounts are also governed by the Charity Statement of Recommended Practice (SORP). This sets out a number of requirements, including that charities must state:
Their charitable purpose,
How they achieve this,
Their progress towards this aim, and any lessons learned.
3. Fundraising Performance
Fundraising performance is another special consideration which is unique to managing charity accounts. The core idea here is that fundraising costs money. As such, you’ll need to track the ratio of costs to income.
This should always be considered in the broader context. Specifically, you should keep in mind a few key facts, including:
Initial fundraising costs are likely to continue providing income well in to the future,
Legacy-based income will likely fluctuate, with little relationship to your costs,
Different kinds of fundraising offer different ratios to their costs, or different margins.
4. Support and Governance Costs
Many charities have an instinct to minimise their costs and expenses, but this can often be misguided. The reality is that running a charity effectively can often be an expensive task. For one thing, competent and experienced staff can command high salaries.
However, failing to budget appropriately for these things, or cutting corners will greatly impact your charity’s longevity. You’ll also need to factor in the costs of working with external bodies, like agency staff or fundraising consultants.
These are what’s known as support and governance costs.
The key thing here is to think hard about the actual value that these costs deliver. Yes, reducing these might free up more resources to allocate to projects, but it is questionable as to whether this will necessarily lead to more effective resource allocation.
5. Pay Transparency
Charities also face greater requirements relating to pay transparency than private, profit-earning companies. Of course, many of the same policies apply, with regards to gender equality, and combatting nepotism.
All the same, there are a number of pay transparency requirements which are unique to charity accounts.
First, you’ll need to include the aggregate pay of all senior management in your financial reporting. This is to ensure that a disproportionate amount of money is not spent on the salaries of your management team.
You’ll also need to have stated salary banding in place, as well as the rationale for developing this framework, as well as reporting the total number and salary of employees earning certain salary bands (this ranges based upon the charity regulator in the country / jurisdiction the charity is registered in)
6. Pension Liability
Many charities are concerned about their pension liabilities, as a high deficit here can make the organisation appear to be in poor financial health. It’s also important to keep in mind that your pension liabilities as they appear on balance sheets are only an estimate.
As such, it’s important to have a clear picture of the amount you’re actually liable for, and how this will impact your future cash-flow.
How to Manage Your Charity Accounts Effectively
There are a number of ways to ensure that your charity accounts are properly managed. For example, having an experienced and effective treasurer will greatly improve your financial standing.
Again, the core of charity accounts is understanding how you acquire, spend and report all financial activity within your organisation.
At S3 Solutions, we have extensive experience of working with charitable organisations across the island of Ireland, providing practical advice on how to manage their charity accounts and linking with appropriately qualified accountants where necessary. Contact our team today to find out more about how we can help.