Finance is hard and boring, and its what you do after you’ve got the money, right? If you are involved in income generation and contracting it is easy to be entirely outward looking – the administration functions are there to keep everything running while you cut loose and fly! But what happens when your pitches are perfect but the contract goes to another charity? You filled out that funding form flawlessly, but the grant goes elsewhere? The major donor loves your work and ethos, but they just don’t feel that they can commit right now?
Charitable income generation is an economic competition, as much as we don’t want to always admit it. Available funds are a scarce resource and charities need to demonstrate both need and reliability to secure them. There can be many reasons why funds and contracts aren’t awarded, but don’t let your financial governance be one of those.
Here are 3 common issues, and ways you can get around them.
1 – Overstated Reserves
Financial years are fixed, the timescales of charitable activities are not. This can mean that sometimes you get income to your organisation in an earlier period than you are able to spend it. Where that income is legitimately restricted you can report it separate to your free reserves. But if that income is unrestricted then charity accounting conventions require you to label it as free reserves – even if it isn’t.
To get around this issue we have the concept of designated funds – which are unrestricted funds that have been set aside for a specific use. These funds can be undesignated later if necessary, but this shouldn’t be seen as a get-out clause for finishing a year flush with unallocated cash. This is why forward planning and good budgeting is essential. If you know what you are going to spend your money on next year, you can put it aside for that purpose and then target any funding gap.
This is most important for trust and grant fundraising, as the organisations that provide these often have maximum reserve policies in place and are used to reading financial accounts to pull this information into their decision-making process.
2 – No Management Accounts
Monthly management accounts can feel time consuming and pointless to create when there are so many other things to think about. In small organisations the CEO or Financial Director may feel that they have operational oversight of costs and don’t need to review them via a separate document. In many ways it is true – it is possible to run many small organisations with ad-hoc reporting and general awareness, at least enough to get the job in front of you done.
Unfortunately, despite being primarily internal documents, many funders will want to see them, alongside the budgets that they refer back to. This is because of the way that those funders approach risk management and is particularly of issue when you are contracting with a public sector body. Despite working alongside the public sector many smaller charities have risk appetites much closer to that of private enterprise – they spend on the possibility of a result. The public sector is only allowed to spend on the (apparent) guarantee of a result.
The irony here, of course, is that many public sector bodies will end up awarding contracts to organisations that have less connection to the work, but slicker back-office teams, because the people involved have to make decisions based on bureaucracy rather than initiative – and this has got worse in the last decade as austerity has cut budgets and increased pressures on staff. The only real answer here is that, if you intend to work on a service commissioning basis, you must have those internal control systems in place. Implementing them becomes not only about how they might build your financial resilience, but also about how you lower your risk – and so up your attractiveness – to commissioners.
Your management accounting doesn’t have to be bells and whistles, it just has to exist.
3 – Ad Hoc and Mis-defined Funds
One of the big problems with fund accounting in charities is that the word fund means so many different things, but when you apply to a grant awarding body’s ‘fund’ you don’t have to keep that in your own accounts as its own fund, separate from each other funders funds… it can certainly get complicated. On top of that, you definitely don’t have to assign individual transactions to that funder’s funds – even if they sometimes act like you do.
A very common issue that you see with smaller charities – and some of the larger ones too – is a CEO or FD taking time to code each individual expense claim, payroll, or other cost across a series of funding pots; funder A has paid for these pens, Funder B is paying for 60% of May payroll and Funder C the final 40%. When funder A and C are funding the same project and funder B isn’t even restricted this micromanagement of cash is a distraction at best. Whilst it is true that funders will usually require a breakdown of the way that their funds have been spent, it is far easier to do this as an analysis after the event. Especially if multiple funds have supported the same project.
And there is a further danger inherent in this sort of presentation, as the cleanup that is required to zero-out funds that have been spent but not properly allocated, or funds that are unrestricted but have been being charged piecemeal, can make the annual accounts into an unreadable mess. Or worse, they can make it look like you are making transfers between restricted funds – something that a prospective funder could well spot and decide that they will steer fully clear.
The key is to switch your thinking of fund accounting from donor-defined to operationally defined. Each restricted fund in your accounts should be related to a specific project. When a funder funds that project, the money goes into that pot, and when you deliver on it it comes out of it.
Talk to each other!
The most important aspect of all of this is to keep talking. Finance people and income generation people should be working together, sharing knowledge, understanding and spreadsheets.