Financial Management

Understanding the numbers

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The second Trustee Charity Finance Competency Survey 2019 produced by MHA and the Charity Finance Group starts by reminding us that the 2017 Charity Commission research on trusteeship “Taken on Trust” demonstrated that 93% of charity trustees “regard their role as important or very important to them”. The report points out that “most [trustees] would be truly shocked if they understood their performance is holding back their charities’ impact on beneficiaries.”

Findings indicated by the respondents show that about 60% of their trustees had the necessary financial skills or knowledge, or that they had a good enough understanding of the charity’s financial governance to undertake their duties well.

This means that 40% of trustees, not far off half, aren’t confident about their charity’s finance. This doesn’t sit well with the Commission’s core duties for trustees set out in CC3. The report doesn’t attempt to suggest why this might be, although training and support is a welcome suggestion that will always help at the margins.

There are probably more fundamental problems including the increasing complexity of charity and length of accounts including gems such as pension deficits, accruals and contingent liabilities, all of which impact at a relatively low turnover of £250k, as opposed to much simpler cash accounting.

 MHA’s welcome report should add grist to the Charity Commission’s review of how the SORP is governed and to what end if it is to help close the gap between what trustees need to understand and what is reasonable to expect them to understand.

Yoke's submission to the SORP consultation

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Yoke has now submitted its response to the consultation about the governance of developing the Charity SORP (the accounting regulations for charities).  In summary we make four points: 

  1. The goal of the SORP is to enforce standardisation and consistency of reporting

  2. Encouraging an infrastructure to interpret accounts (by sector) based on the Commission’s website data will improve transparency

  3. Reporting on impact should be undertaken by people who are appropriately experienced and accountable

  4. There should be a better way for niche or technical improvements to accounting policy to be considered and incorporated in the SORP.

The charity reserves conundrum

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Just before Christmas the Charity Commission published its findings on Charity Reserves. Although 92% of the charities sampled explained their Reserves Policy and 90% explained why they were being held, a third of charities failed to disclose the actual level calculated in accordance with the Commission’s guidelines.

There will be several reasons for this lapse but an underlying one is that there is confusion about what people think ‘charity reserves’ mean. At a simple level there were differences between the Commission’s definition (in CC19) and the SORP definition which charities follow when preparing their accounts. At a more fundamental level there is real confusion amongst users. The formal definition of reserves excludes illiquid assets such as the property the charity uses in its work (which suggests the focus is in part on liquidity) but investment property is included which suggests it is not. To many a charity’s reserves will be Trustees’ long term policy of what they feel is the right size of cushion to underpin their long term charitable purpose.

The problem for the Commission is surely that they are pulled in two different directions – some charities keep far too much, and some (Kid’s Company is the usual suspect) keep far too little. These are difficult aims to reconcile in one formula. Focussing on liquidity suggests that charity Balance Sheets can never reshape themselves into something more efficient, and arcane calculations undermine efforts to allocate more  reserves to beneficiaries.

Reserve levels in charities are a complete substitute for the profit line in commercial companies. Finance Directors should drive their organisations based on long term reserve planning. Unlike a business, in a charity a profit or loss only matters in the context of its reserves. 

We believe that Trustees should always be able to answer these three questions:

  • Do we currently have sufficient cash to pay our bills as they fall due?

  • In accounting terms are we fully solvent? 

  • How large a reserve to we want to keep, and for what purpose?