For trustees of UK charities, understanding the financial health and direction of your organisation is paramount. An essential component of this comprehension is the charity’s financial statements. While these documents might initially seem daunting, they provide invaluable insights into the charity’s fiscal wellbeing.
How can trustees decode and utilise the financial statements for effective governance?
The importance of financial statements
Financial statements serve as a transparent record of a charity’s financial activities. They not only ensure trustees fulfil their legal and regulatory responsibilities but also act as a tool for strategic decision-making and donor confidence-building.
The core components
Statement of Financial Activities (SOFA)
This is akin to a profit and loss account for businesses. It provides a comprehensive overview of all income received and expenditure incurred over a given period. Look for surplus or deficit figures to gauge financial health.
Balance sheet
This snapshot provides a moment-in-time view of a charity’s assets, liabilities, and funds. Assets (what the charity owns) minus liabilities (what the charity owes) will give you the charity’s net assets.
Cash flow statement
This indicates how cash is moving in and out of the charity. It can be particularly insightful for assessing liquidity and the charity’s ability to manage short-term financial obligations.
Restricted vs unrestricted funds
This distinction is crucial in charity financial statements. Restricted funds can only be used for purposes specified by the donor, while unrestricted funds provide more flexibility. Ensure these funds are managed and utilised correctly to maintain donor trust and legal compliance.
Notes to the accounts
Often accompanying the primary statements, these notes offer detailed insights into specific items, helping to contextualise figures and providing a clearer understanding of the charity’s finances.
Independent examiner’s or auditor’s report
Mandatory for larger charities, this external evaluation provides an independent perspective on the financial statements’ accuracy. A clean bill of health here can significantly bolster stakeholder and donor confidence.
The role of trustees
As a trustee, your duty extends beyond mere acknowledgment of these statements.
- Engage proactively
- Ask questions: If something is unclear, seek clarification.
- Be forward-thinking: Use the data to forecast and strategise for the future.
- Engage experts: Regularly consult with accounting professionals to ensure the charity’s financial compliance and health.
A thorough understanding of charity financial statements empowers trustees to make informed, effective decisions. It nurtures transparency, accountability, and trust, forming the bedrock of a successful charitable organisation.
The next step
If you would like a deeper dive into your charity’s financial statements or for tailored advice, our charity experts are available to help. For any furither information, please contact Caroline Webster on c.webster@uhy-rossbrooke.com or your usual UHY adviser.
