Good accounting and financial governance processes are essential for UK charities to ensure that they are operating effectively and efficiently. The potential failures, identified in a recent inquiry the Charity Commission opened into a religious poverty relief charity, demonstrate the importance of having robust financial systems in place to prevent financial mismanagement and misconduct.
We know from experience that many churches and other charities struggle to keep up with sometimes complex and unfamiliar accounting requirements and legal prescriptions for their annual accounts (while perhaps not so extreme that the Charity Commission becomes involved). Good and robust accounting and finance processes go beyond compliance, however!
Here are some reasons why good accounting and financial governance processes are important for UK charities:
- Compliance with legal requirements: Charities are required to comply with legal requirements for accounting and financial reporting. Failure to do so can result in regulatory action, as seen in the case of Jesus Power House Ministries LTD.
- Effective decision-making: Good accounting systems can provide charities with accurate financial information, enabling them to make informed decisions about their operations and finances.
- Improved impact reporting: Effective financial management can lead to better impact reporting, which is important for demonstrating the effectiveness of a charity's work to funders and stakeholders.
- Increased accountability: Charities have a responsibility to be accountable to their stakeholders, including trustees, governmental funding bodies and private donors. Good financial governance processes can help to ensure that charities are transparent and accountable in their financial reporting. Ultimately, in a Christian context, we know that we are also accountable to the true owner of these resources and will have to give an account for our stewardship of these resources.
- Financial resilience: Effective financial management can help charities to build financial resilience, which is important for their long-term sustainability.
To ensure good accounting and financial governance processes, charities should consider the following:
- Capacity: Many charities, particularly smaller organizations, struggle to dedicate the necessary resources to financial affairs. Charities should ensure that they have the capacity to manage their finances effectively. Over-reliance on one individual is dangerous, finance is always better as a team sport! We consider that here: How to create a finance team for your church or Christian charity. Often, we find that churches and charities struggle when they lack the internal capacity they need in this area, but they are unwilling to consider bringing in outside help (or just don’t think of that option).
- Training and education: Charity finance workers need proper guidance on using financial systems and unlocking their full potential. Charities should provide training and education to their employees and volunteers to ensure that they are equipped to manage the charity's finances effectively. When a treasurer leaves unexpectedly, some of these knowledge gaps can be quickly exposed. We look at what to do in those situations in another briefing paper: What to do when your church treasurer leaves
- Financial record-keeping: Charities should keep accurate financial records to ensure that they are compliant with legal requirements and can make informed decisions about their finances. Over-reliance on spreadsheets or paper-based accounting methods can lead to errors and inaccuracies where things are complex, so in those cases charities should consider using accounting software to better manage their finances. Stewardship’s briefing paper on this topic considers some of the options and factors to take into account: Accounting packages for churches and small charities
As we note above, a major source of charities’ struggles in managing their accounts well just comes down to a lack of capacity – and sometimes knowledge. Unfortunately, too often churches and charities struggle to find volunteer treasurers or trustees with either the necessary expertise, or enough available time to give to bookkeeping, internal reporting and external accountability.
Stewardship supports almost 450 churches and charities in finalising their year-end accounts. If this is a burden for you, we can help you too! Stewardship - Accounts Examination Service. However, many charities need ongoing support for bookkeeping and internal reporting. Connect Supply was set up specifically to support churches and charities in this way, and shares Stewardship’s desire to see these organisations flourish in administration, accountability and attitude towards finance. More on their services, and how they can help your church or charity cast aside the burdens of finance administration, can be found here: https://www.connectsupply.co.uk/
We look forward to hearing from your church or charity!
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