Improving your charity’s finances (CC12)

Managing charity finances can be very challenging. We want our charities to achieve real change, we want them to use money effectively and we want them to be still doing that long into the future. This can a very difficult balancing act.

The Charity Commission has updated its guidance on ‘Improving your charity’s finances’ (also known as CC12). The updated guidance can be found here: Improving your charity’s finances (CC12) - GOV.UK. There are some changes from the earlier version of the guidance and, because this is such an important issue, we want trustees to be aware of what the guidance says.

It is of course very sad when any organisation finds itself in financial difficulty. This is even more so when those leading a charity are deeply involved in the work of the charity, both practically day-to-day and emotionally. As a result, they may not be able to see the bigger picture when the charity is in financial trouble. This trouble may be a slow decline, or it may be a sudden problem (for example, where they are very dependent on major grant funding or donations which are delayed or lost).

What steps can be taken to reduce the risk? We all know that ‘prevention is better than cure’, but prevention needs planning which, in turn, needs up-to-date, reliable financial information.

Starting with financial information: there are warning signs that leaders and trustees should look out for.

These will include:

• the bank balance reducing without a corresponding increase in amounts due to the charity
• the charity taking longer to pay its bills
• the charity becoming more reliant on money coming in to meet regular expenses

These may seem obvious, but would you know if these were happening?

A very real example, where issues can be hidden in a poor accounting system, is when a charity has money that is received for one specific purpose (to a restricted fund) and not spent, so masking other funds running out.

Many churches and charities we see do not have accounting systems that give that information. If you are in that situation, there are many accounting packages available and more guidance on this can be found here: Accounting packages for churches and small charities .

CC12 does emphasise that information will only be effective if action is taken based on what is known about the financial situation. An essential part of monitoring church or charity finance is the preparation of a budget, and then actual income and expenditure are monitored against the budget, and expectations are regularly revised to take account of actual figures.

In addition to being alert to potential financial difficulties, charity trustees also need to be alert to other financial issues, such as ensuring that all charity money is only spent on properly achieving the charitable objectives of the charity, that the level of reserves being held stays appropriate for the size and nature of the charity (which can change as the operations change) and that specialist professional advice is taken when it should be.  We have seen all of these create real financial problems.

Sadly, even when charity trustees follow best practice and monitor the charity’s performance regularly and efficiently, there are still occasions when the financial position is such that the charity is unable to continue operating. In such cases, it is vital that the charity trustees take immediate action, particularly where the charity is operating in a form that does not limit the extent to which the charity trustees might be personally liable for the charity’s debts (for example, charitable trusts or unincorporated associations). CC12 gives much useful advice to trustees who find themselves in this situation.

The guidance also includes a lot of helpful information about financial controls, as well as on reviewing and managing the financial risks within a charity.

All of this can seem very daunting to whoever might be a treasurer or finance officer of a charity but of course all trustees are responsible for making themselves aware of the financial position.

We use a phrase at Stewardship that ‘finance is a team sport’, even when one or two people do most of the detailed work, and the creation of a small finance team can help to spread the load (see our briefing paper How to create a finance team for your church or Christian charity).

A useful starting point to encourage trustees to engage with these issues is to have the subject of finance on every meeting agenda, even if only briefly, and perhaps to use the Charity Commission’s 15 questions on charity governance, finance and resilience as a framework to structure a regular discussion around these topics.

Ensuring that there is regular discussion of financial issues, which is based on timely and accurate information, will really help the trustees in meeting their responsibilities, and will also make it easier to attract new trustees, which is something that will benefit the charity and help to preserve the work that it does. We recommend CC12 is looked at again, along with the free blogs and briefing papers on our website.