What financial information do we need?

Why bother?

Preparing regular financial information takes time. And that is something that most small charities don't have a lot of. However, investing some of our time in being on top of the numbers pays dividends. A good financial report will tell us when we have a problem and a really good one will buy us time to fix it.

We always recommend spending at least two days a month on the finances. One looking backwards and one looking forwards. Organisations that do this stay on top of the numbers and are better able to respond to change and navigate uncertainty when needed. Never let one spreadsheet stop you from changing the world.

What makes for a good finance report will differ from small charity to small charity. But there are commonalities and we cover some of them here.

Monthly management reports

Our recommendation is for small charities to prepare monthly management reports. We want one spreadsheet - with different tabs perhaps - which shows us:

• our recent financial past
• our financial present
• our financial future

Ideally, we will have this report just after the end of the month so that we are looking at timely information. However, there is always a pay off between timeliness and accuracy and so some small charities might decide that taking a bit more time to prepare the numbers will be time well spent as the numbers will have a higher level of confidence.

Only you can decide what you are aiming for. Whatever it is, week one, week two, even week three, we recommend making it a monthly deadline and sticking to it wherever possible. Finance always falls into the important not urgent box. It is so easy to let it slip when we have a lot on our plates. Resist this slippage wherever possible. It often leads to problems further down the line.

01 | Budget

We will need our annual budget to show us our intended path through the year ahead. Ideally, each grant will have its own column unless all of our grants are small and for the same activity in which case we might be able to put all of these in one column together. We will also need a column for our unrestricted income. This will make it easier to track how our reserves are going. It probably looks something like this. 

02 | Monthly Actual v Budget Report

The world never pans out how we expect it to. The budget will be out of date the minute the ink dries. So we need to have a system for monitoring the budget and seeing where the variances are. Which is what an actual v budget report is.

An actual v budget report compares what you thought was going to happen in the month (your expected income and expenditure in your budget) with what actually happened in the month (your actual income and expenditure from your bookkeeping system).

You can then analyse the variance between the two to inform what you will do next; you may need to change your budget or change your activities.

In our experience, this works best when it is prepared and scrutinised monthly as it gives time for us to fix any problems if we are over/underspending.

It may look something like this with our unrestricted funds clearly highlighted to draw attention to them.

This is a big subject, for a brief introduction, check out our blog.

03 | Balance Sheet

Balance Sheets are one of those reports that never get sufficient attention in our experience. Many small charities prepare one a year at year-end. Which is a risk we think. Especially, if we are using an accounting platform such as QuickBooks or Xero. It is so easy to miscode something and for income or expenditure to end up on the balance sheet which can really distort the figures and make us think we have more - or less! - money than we actually do have.

A balance sheet has two halves. The top half shows where all our funds are and whether they sit in assets (what we own) like fixed assets (computers, vans etc) or current assets (invoices people owe us and cash in the bank) or in liabilities (what we owe) like bills we need to pay. Net assets shows the difference between the two and is what we are worth financially (a horrible way of thinking about a charity we know). If net assets are getting smaller every year, we are contracting. If they are getting bigger every year, we are expanding.

However, we can't stop there. The bottom half of the balance sheet tells us whether our net assets are in restricted or unrestricted or designated (designated funds are unrestricted funds that we have ringfenced for a particular purpose) funds.

This is useful because if we take our unrestricted funds and take off fixed assets (the ones we use to actually do our charitable work) and we take off designated funds then what is left is our reserves. And we all know that reserves are our golden number. 

So we cannot recommend strongly enough to prepare a balance sheet every month and make sure you know every number on it. 

04 | Cashflow forecast

A good budget will tell you how much your intended activities are going to cost, and a monthly actual v budget report will tell you whether you are on track or whether you need to make changes. Neither will tell you if the money will arrive in time for you to make the various payments, rent, salaries, heat and light etc. And it is the timing here that counts. We want to be confident that we can pay all bills as they fall due. Not being able to pay staff because we haven't managed the cashflows is never OK.

A cashflow forecast is a relatively simple finance tool that can help us predicts our future closing balances. By plotting our income and expenditure budget according to which month the various transactions will land in our bank account we can get a fairly realistic picture of the financial future. If the closing bank balances dips into negative at any point this means that we will to take corrective action, typically, pushing expenditure back, bringing income forward or getting an overdraft. 

A cashflow forecast is invaluable and a key financial risk management tool. It gives us valuable time to fix things should we need to. An example is below.

05 | Metrics 

So far, our monthly finance report comprises a number of spreadsheets. For some people this will create a great sense of calm. For others it may do quite the opposite. It takes a whole village to raise a child and a whole organisation to build longer term financial resilience. This means that we need to make the information as accessible to everyone as possible. We need all key finance messages in words, numbers and pictures.

Having some simple charts that show what good looks like and how close or how far we are from that both now and in the future - our actual v our target reserve for example - can help make the financial position - and risks! - clear when spreadsheets alone aren't quite enough.

In the example below, a small charity has determined four key risks:

Top right - cash could be problematic and so it has forecast its cash balances. The best case (light green line) shows that bank balances are expected to remain higher than its minimum requirement (dark green line). However, in its worst case they are expected to drop below its minimum requirement.

Top left - fundraising is challenging and its cost base is fixed which creates a degree of uncertainty. By tracking its secured income compared to its costs base in both the best case and worst case version of the future it can then have honest conversations about the level of financial risk and potential options.

Bottom left - the charity has set a reserves policy which set a target range of reserves. By tracking its actual and forecast reserves against its minimum and maximum target reserve it can make sure when planning that reserves do not go too high or too low. 

Bottom right -  this charity is also tracking its resilience indicators. A resilient organisation is resilient in its purpose, its people and its money. This charity has chosen resilience indicators across each three; reserves to indicate financial resilience, staff numbers to indicate its people resilience and beneficiary numbers to indicate its purpose resilience. A resilient organisation will be resilient across all three. This organisation is at risk of compromising its resilience. Although it is doing great on impact, it is lagging on its financial reserves and on its people resilience.

Charts can be a useful way to show what our actual position is compared to where we would like to be. They can be more accessible and engage a wider audience which helps a lot when taking financial decisions.