How to do financial governance



How to

do small charity financial governance


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Financial governance


"Financial controls and financial governance means the way your organisation's finances and records of financial transactions are set up and run."


The National Lottery Community Foundation


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What this means for our small charity


Often, we think of financial governance as something that is done by a Board during their quarterly meetings. We might think it's about complying with the Charity Commission guidance. Maybe we think of it as something that is only done by Trustees.


In reality, good financial governance is all of this but it is also all those many day to day actions and decisions that we take when we manage the finances of a small charity. It includes making sure that we have robust financial controls to protect our money from fraud, it's making sure that we have systems to track restrictions on funds and it's being confident that we will be around for as long as we need to be for our beneficiaries.


A lot of this can be achieved by:


  • being familiar with Trustee's financial responsibilities
  • having good finance systems and processes
  • being able to understand our financial position and manage our risks


Below we offer some thoughts on the core financial responsibilities that we need to consider.


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But I don't do numbers


So we hear this a lot. And we sympathise. Many leaders don't feel confident in this area. And we don't blame you. It is highly regulated. It is technical. There is a lot to know. The stakes can be high. And we often feel that numbers are either right or wrong. We think we everyone finds it a bit daunting at times - even the professionals. Which is helpful actually. A little bit of fear in finance goes a long way. It helps us slow down and double triple check. Both super helpful behaviours when it comes to building long term financial resilience.


However, we also know from personal experience from working with 100s of leaders over the past 20 years that we don't need to be a chartered accountant or a governance specialist - though access to both is needed at times - to do good financial governance. We just need to embrace the finances and recognise that they are a core part of running our organisation.


Honestly, we have worked with some really arithmophobic folks and we have yet to work with one who doesn't have a strong inner finance director - even if they haven't found them yet - small charity leaders are much better at finance than they think they are. Some just need a little extra support to put it into formal systems and processes. And anyway, whether we have a finance background or not, we can all build good financial governance into our Board and Executive practices. We see it every day.


It won't look the same for all of us. Some of us will roll our sleeves up and do the financial recording and reporting in house. Some of us will delegate this to a Board member or to an external finance lead. What is important is putting in place the arrangements that work for our charity which enables us to be in control of our numbers.


We cannot emphasis enough how important it is to have good financial governance in a small charity. It is a key resilience asset and can mean the difference between surviving and not surviving even when the numbers are going the wrong way.


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But surely that is why we have Treasurer? Don't they do it all?


Ha! If only.


Trustees are all collectively responsible for the financial implications of all decisions taken with their authority. Yes, they can appoint officers to lead on specific issues, such as a Chair to lead the Board, or a Treasurer to lead on the finances, but any heavy lifting that Officers do cannot replace Trustee's collective responsibility.


The Honorary Treasurer's Forum summarises the role of the Treasurer neatly:


  • to monitor the financial administration of the charity and report to the board of trustees, in compliance with the governing document.
  • to oversee the charity’s financial risk-management process;
  • to act as a counter signatory on payments and applications to funders; and
  • to provide board-level liaison with the external auditors on specific issues such as the Auditors’ Management Letter and the related board representations.


And so while having a Treasurer is a fantastic financial governance asset they cannot replace that need for collective ownership of the financial governance. That falls to us all Trustees, and by extension, to the charity's leadership and wider team.


And that's if we can actually find a kind hearted finance sole to take on this role. Many small charities tell us that they find it difficult to find a Treasurer. We sympathise with this and know how difficult it can be. We recommend Reach Volunteering and Charterpath as great sources of specialist volunteer support for charities.


And if you have tried recruiting and your Treasurer seat is still vacant then don't despair. There is a view that having a dedicated Treasurer role is detrimental to a charity as it encourages other Trustees to abdicate their own financial responsibilities. And the good news is that good financial governance is, happily, perfectly achievable even when we don't have a Treasurer.


Read on to explore ways in which you can strengthen the financial governance in your charity.


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Be familiar with Trustee's finance duties


Being familiar with the financial duties of Trustees, is the best place to start when it comes to financial governance and that means being familiar with the Charity Commission's guidance.


As the regulator of charities in England and Wales, the Charity Commission is not only a bit watchdog, it is a lot (critical) friend when it comes to our financial governance. We are, at most, mere stewards of the funds that are given to us when we run a charity. All money is given to us on trust to apply to our charitable objects (which are the bullet points at the top of our governing document stating what we have been set up to do) for the benefit of the public. Therefore, there are certain things we need in place to make sure we do this.


Yes, the Charity Commission's guidance is wordy. It is written for the 167k charities on the register which is a wonderfully broad church. However, it also tells us pretty clearly what we need to know and what we need to do when it comes to the financial stewardship of our own organisation.


For an overview of Trustees finance duties, we recommend starting with the Charity Commission's guide Managing Charity Finances. It lists the core finance duties and for each one there is specific, more detailed, guidance for when we need a deeper dive:



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Protect the money


For an overview | Managing Charity Finances

For a deeper dive | CC8 Internal Controls for Charities


In summary


Our job is to put in place robust financial controls, benchmark them against the Charity Commission checklist, write them down, follow them and review them annually.


Our view


This is front and centre for a reason. We need to be confident we have done as much as we can to protect our money from fraud and make sure it reaches the intended destination of those who donated it to us, or when we generate it ourselves, it is applied to our charitable objects.


People often say to us that they find controls frustrating. That they slow things down. For us, this is a good thing. Mistakes happen when we are speeding along. We click on the wrong link. We add an extra '0'.  In our view, good financial controls are meant to slow us down and if there is sometimes a panic to get payments made, and we are not in a charity which provides emergency relief, we remain stubbornly of the view that what we have is not a controls problem, it is a management problem.


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Keep accurate records


For an overview | Managing Charity Finances

For a deeper dive | CC15d Charity Reporting and Accounting


In summary


Our job is to make sure we keep a record of all our financial transactions - with supporting paperwork for the audit trail.  This set of financial transactions then feeds our mid-year and year-end accounts.


Our view


Bookkeeping


Bookkeeping is the process of keeping a record of all financial transactions as they happen. In finance, all roads lead to bookkeeping so it is worth investing in. A good bookkeeping system can take us an awful long way when building longer-term financial resilience. And to be honest, we can't do much without it!


And anyway, Goethe said that bookkeeping is one of the finest expressions of the human spirit. We agree. Poetry in numbers. 


Some small charities use an Excel cashbook for their bookkeeping system. We see this working perfectly well for smaller charities with just one or two grants. When our finances get more complicated it can be better to move to an accounting system such as QuickBooks Online or Xero. Both work perfectly well for small charities, though we have slight preference for QuickBooks Online because the pre-set reports are slightly stronger in our view. Yes, there is a cost to these packages but from our point of view we think this is best considered as an investment rather than an expense. Whatever system we use make sure to review it regularly and make sure it matches (reconciles with) our actual bank statement to make sure it is both complete and accurate.


Year-end accounts


Year-end accounting requirements vary depending on the size of the charity - some can prepare simple receipts and payments accounts while others need to prepare accrual accounts that are compliant with the Charities SORP. It is worth checking here to make sure we prepare the right type of accounts. The Charity Commission helpfully offers receipts and payments templates and accruals accounts templates for and example accounts for a range of charities.


External scrutiny


Most charities with an annual income over £25k need external scrutiny of their annual accounts. Smaller charities with an income under £1m pa can have an independent examination which is a lighter touch, larger charities and all those who are charitable companies need a full audit. For more details and to do a proper check, this will help.


This bit is really worth investing time, energy and money to get it right. Contact us for mentoring support if you need help.


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Know the financial position 


For an overview | Managing Charity Finances

For a deeper dive | Charity Reserves, Charity Fundraising, Investing Charity Money, Trustees,  Trading and Tax


In summary


Our job is to change the world and remain financially fit. This means:


  • setting out our real world plans
  • building a fully costed budget
  • raising funds - and knowing the rules relating to this
  • monitoring the budget and managing the financial risks and, last but by no means least, having a reserves policy for any funds not yet spent.


Our view


This all sounds lovely and simple.


The truth is that in practice it is a little more involved. Mainly because donors and funders often place restrictions on funding and also because commissioners do not often pay the full costs of delivery.


Therefore, we need to make sure that our systems track the full cost of activities and the extent to which we recover the full costs. We might be subsidising some activities with unrestricted income or with reserves. This is all perfectly fine providing it is intentional, strategic and affordable.


However, when our internal subsidies are a surprise at year-end and when we are funding activities that are low mission or when this is compromising our longer term financial position we need to take corrective action.


This, alongside the next duty to manage financial difficulties promptly, is, in our opinion, the most difficult bit of running a charity. Knowing the financial position requires a really good budget and a really good bookkeeping system. It also needs confident financial decision making. For help with any of this please look at our signposting page and/or our mentoring service.


In the meantime, key questions we can ask:


  • Are we a going concern? Are assets greater than liabilities and can we pay our bills as they fall due for the foreseeable future (typcially 12-18months)?
  • Is spend on grants in line with agreed timelines or might we under-/over-spend?
  • Are unrestricted funds running at a surplus or deficit and are reserves going up or down?
  • Do we have any internal subsidies and are these intentional, strategic and affordable?
  • Is our reserves policy up to date and do our actual reserves meet it?
  • What does the most likely financial future look like and do we need to take any corrective action?


For more useful questions, check out Lloyds Bank Foundation's Organisational Resilience guide which we co-wrote with and for small charities with Tom Watson and Richard Frost and the Development Team at the Foundation.


For more information on how to analyse charity accounts, the New Philanthropy Capital's Little Blue Book is a fantastic resource.


Contact us for mentoring support if you need help working through it all.


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Manage financial difficulties promptly


For an overview | Managing Charity Finances

Key guidance | CC12 Planning, managing financial difficulties and insolvency


In summary


Our job is to know what good - and not good - looks like, put in place the systems and processes to determine and manage financial risks and where we can't help but get into difficulty (and let's be honest, if we had set out as a sector to make it as difficult as possible for small charities to be financially sustainable we have nailed it!) we need to be familiar with what's required of us and act promptly.


Our view


"How did you go bankrupt? Two ways. Gradually and then suddenly."

Ernest Hemingway, The Sun Also Rises, 1936


To be honest, this is our experience of small charities. Many will struggle to become financially sustainable though most do survive. And that it an enormous achievement that needs celebrating. However, so many small charities survive in the messy middle which makes it essential to keep on top of the numbers, know what good looks like and take corrective action promptly when needed. Things can spiral downwards quickly when financial difficulty sets in and our job is to stay in control. Control is important as this is how we continue to safeguard vulnerable beneficiaries, volunteers, staff and Trustees.


This is a very broad subject and exactly what this means will vary from charity to charity. We have a signposting section on managing financial difficulties on The Small Charity Finance Resources List.


The most useful thing we can say is to keep on top of it all and respond promptly when needed. Sometimes this will mean contracting hard to avert an imminent crisis. Sometimes, this will mean taking the long view and slowly but deliberately changing the business model to make it more viable over the longer-term.


If your organisation is experiencing financial difficulty, and you are not sure how serious it is, in addition to CC12, this guidance note on what it means to be a going concern from Saffery can help clarify what you need to think about and this technical fact sheet from professional accounting body ACCA helps with some of the deeper technical considerations.


If you think your organisation is in financial distress then both Charity Finance Group and the Association of Chairs have an insolvency helpline for members and the Decelerator also gives support to leaders thinking through endings.


Contact us for mentoring support if you need help working through it all.


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Keep the Charity Commission register up to date

For an overview | What to send the Commission


In summary, our job is to:



Our view


Our recommendation is to always appoint an accountant to support you with the statutory requirements. We recommend making sure that they are familiar with charity governance and the charities SORP (accounting regs for charities).


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Next steps


To review your financial governance, you can:



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Lead your organisation to a more financially sustainable future





"Awesome session
which took the 
fear out of 
financial planning"

Getting on top of and keeping on top of the numbers in a small charity can be challenging. 

Small charity finance is technical, regulated and complicated. It can be, we are sometimes told, boring, and when the numbers don't go the right way, it can be anxiety provoking.

We understand the challenges small charities face when building financial sustainability. We explain finance in a simple, accessible way. We take the stress out of it all. 
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