Charity Finance: Key Considerations
Financial management is something that all organisations must carefully consider.
With charities in particular, many underestimate the rules and regulations that are involved, which can lead to huge ramifications. That’s why it is important to fully understand how charities work financially, so that operations can be as seamless and efficient as possible.
In this blog, we will talk you through the key considerations to be aware of when it comes to charity finance.
What Makes Charity Finance Different
Finance in any industry can feel like a complex area to tackle. Because of this, it can often get swept aside and left for someone less experienced to deal with. When it comes to charities, maintaining accurate finances should always be a priority. This is especially true because of how vastly different charity finances are handled compared to other companies.
While day-to-day duties might not be too dissimilar, transparency is at the forefront of charity operations. As charities are publicly funded via grants and donations etc., they have a certain responsibility to disclose how the money is sourced and spent.
Essentially, everyone needs to know:
What money is coming in and where from
What money is going out and where to
How this money fits in with the charity’s strategy
Because of this, there are several key considerations that charity staff must be mindful of.
Charity Finance Considerations
Below is a list of our top considerations when it comes to charity finance:
Accounting for Funds
As mentioned before, a big difference for charities is in how they record their finances. This is so that they can appropriately follow charity governance. By law, every charity must prepare a set of accounts and a trustees' annual report. The aim of accounts and reports is to provide a clear picture of the charity's activities and financial position. The trustees' annual report is also an opportunity to describe the positive work to the public and funding bodies.
Charity funds tend to fall into two categories: restricted and unrestricted.
Restricted funds are where the donor defines how the money is spent. This is usually the case with large sums of money. For example, it could be that a donor has given funds as a grant to pay for a new initiative, or as part of an appeal for a new building.
No matter the reason - if it is a restricted fund, you are duty-bound to spend the money only for that stated purpose.
While this type of finance is great as it is usually of high value to the charity, it also comes with implications. For accountability purposes, you have to prove that every penny spent went towards the identified purpose. If there are any deviations from this, then the charity could place itself in a risky position of violating terms and agreements, meaning it may need to pay the funds back and jeopardise its reputation which would hinder future funding.
On the other hand, unrestricted funds mean the charity has greater freedom over its spend. This is usually split up even further into general funds and designated funds.
General funds is the money that the charity has at its disposal to spend on charitable objects at its discretion. This is more favourable because it gives charities the opportunity to pursue their aims without external interference.
Designated funds are earmarked formally by the trustees for a particular purpose, and can be formally undesignated and go back into the general fund as and when necessary.
Investing in Training
To ensure that best financial practices are always followed, charities should consider regular training for its staff.
There is a wealth of support available to help individuals improve their financial management skills. The NCVO and CFG offer a great mix of online and in-person courses to suit a range of expertise levels.
By investing in nurturing such skills, a charity can only expect to succeed.
If hiring in-house, a common misconception is that those managing charity finance need to have specific charity accounting experience. Really, it is far more helpful for them to have a strong, generic financial background, and the ability to communicate well so they can interpret financial information and translate it into meaningful results for others to easily digest.
If having an internal finance manager is not an option, then some (or all) aspects of financial management can be outsourced. Sometimes it is a lot easier to outsource help from an external specialist, as it can save a lot of time and money in the long-run.
This could be an individual or a company, and they can assist with specific things, whether it be consulting on financial strategies, or organising payroll. There are many different types of help out there that can help keep a charity’s finances in line.
There are a lot of considerations for charities in terms of managing finances, but the most important thing is to get the basics right and to know where to look for help and support. By implementing a few simple processes and accessing the right information and resources - charities can safely ensure that they practice good financial management.
At S3 Solutions, we are known for our highly engaging and accessible consulting services, embedding principles of co-design and consultation to produce actionable insights and innovative solutions. For more advice on charity finance best practices, contact the S3 Solutions team today.