Understanding Financial Controls for Charities
More than any other sector, charities are subject to tight financial regulations. If you want to be successful in the third sector, you’ll need to have a good understanding of financial controls for charities.
Since charities work with donations, grants and other sources of funding, they have to prove that this money is being used prudently. This protects charities, funders and service users alike.
However, it also creates a range of operational challenges.
Today, we’re going to help you cover everything you need to know about financial controls for charities. Let’s start with the basics.
What are Financial Controls for Charities
Essentially, financial controls for charities are a series of checklists and procedures, which ensure that finances are acquired and spent properly. This helps charities to:
Operate within the law,
Manage financial risks,
Maintain effective financial reporting,
Make better financial decisions.
In this way, understanding financial controls for charities not only shields you from risk, it also helps to maintain your compliance with relevant regulations.
Charities face a wide range of financial risks. These include human error, theft, craud, embezzlement, poor decision making, or other kinds of mismanagement. These are difficult to eliminate entirely, but proper financial controls help to minimise the risk to your charity.
There are three key areas where financial controls for charities apply. These are:
Purchases, payments and loans,
Assets and investments.
Let’s take a look at what you need to know about each of these.
Financial Controls for Income
The first set of financial controls concerns where your charity gets its money from. Most charities have a variety of income streams, from small public donations, to major gifts, and statutory funding.
There are specific checks for each of these funding streams. Specifically, these include requirements for:
Public collections and fundraising events,
Gift aid donations,
Tainted donations and major donors,
Each of these income streams has specific controls. However, some core principles apply to all sources of charity income. These include proper accounting and recording of all income, as well as putting measures in place to ensure that cash is handled securely at all times.
For example, for all cash donations, counting and processing must always be conducted in the presence of two unrelated people. Charities are also responsible for effective record keeping, for both internal and taxation purposes.
Purchases, Payments and Loans
Understanding financial controls for charities also means knowing how you should spend and distribute funds. This includes:
Payment for goods and services,
Distribution of grant funding.
There are also specific financial controls for different payment methods, including card transactions, bank transfers, cheques and cash. However, cash transactions should generally be avoided, as these create unnecessary risk.
At a basic level, all charities should have a written policy in place for the authorisation of payments, including whose signature is needed, and how many signatories are needed for each payment.
All actual payments must also be thoroughly checked against invoices, orders or bills to ensure that the proper payment has been made.
Charities should also place controls on the spending of individual trustees and employees. For instance, spending limits may be placed on the cards or cheque books of individual staff members.
There should also be processes for secure storage of cards and cheque books, as well as for their removal when someone leaves the team.
Financial controls for charities which distribute grant funding are somewhat more complex. This relates to the fact that all charitable grants must further the funding organisation’s own aims and objectives.
There are three strands to financial controls for charities who distribute grants. These are:
Creating policies for the types of organisations and projects which are eligible for grant funding,
Having solid procedures in place for assessing grant applications and awarding funding to deserving organisations,
Monitoring how any grant funding is spent.
Assets and Investments
Many charities also have financial assets other than just cash in the bank. Most often, these include fixed assets, such as:
Fixtures and fittings.
When it comes to understanding financial controls for charities which hold fixed assets, the key principle is preventing loss or damage. On one level, this includes taking practical steps to protect fixed assets, such as through proper valuation, insurance and maintenance.
Beyond this, financial protections should also be in place, to avoid the loss of fixed assets.
A key part of this is placing limits on the capitalisation of any fixed assets, including where they are used as collateral for loans of other financing methods. The idea here is to prevent the loss of critical assets if your charity defaults on the loan.
Of course, your charity may also hold non-fixed assets. These can include any investments the charity holds, or any cash which has been taken as a deposit on goods or services.
Since charities are generally required to use funds to work towards their change model, most income should be spent rather than invested. However, investments are often used as an effective way to create a reserve fund.
Where this is the case, charities should regularly monitor the performance of their investments, and seek out financial advice if they don’t have sufficient in-house expertise to make sound investment decisions.
Understanding Financial Controls for Charities
All financial controls for charities are intended to protect organisation, service users and funders from mismanagement, risk and even financial crime. As such, maintaining the correct standards is crucial for the efficiency and longevity of all charities.
Since charities carry out a range of different projects, using varied funding sources, different controls are applicable in different contexts. As such, it can often be difficult for smaller charities to understand what is required of them.
However, the risks associated with not understanding financial controls for charities are too great to ignore. They might even lead to your organisation closing its doors.
As such, if you are in any doubt about what is required of you, it’s essential to speak to an experienced charity consultant.