Managing finances in small charities can be challenging, but financial governance is at the heart of long-term success. Having recently attended the ICAEW Zoom event ‘Small charities – tackling financial governance challenges’, these are some of my actionable takeaways for trustees and leaders seeking to enhance their organisation’s financial foundation.
The finance agenda
Who’s the ‘financial conscience’ of your charity? Trustees play so many roles, but one of the most critical is keeping track of the charity’s financial heartbeat. While finances are usually discussed at trustee meetings, how often is the financial information jargon free, relatable? The whole trustee board should feel empowered to engage with financial data, exploring how finances can be optimised and utilised, identifying areas for impactful change and considering adjustments to better achieve the charity’s mission.
Financial resilience
To determine financial resilience, charities must focus on income, costs and demand for services. The first step is to understand the fixed costs for the charity and whether there any areas reductions can be made. The second step is to gain clarity over income streams and whether the flow of income is regular or irregular.
Both the costs and income will be impacted by the demand for services. The two key questions are:
- Do the service strategically align with the charities objectives?
- How many services can you provide, knowing the position of your fixed costs and income streams, without becoming financially vulnerable?
Financial health
The financial health of a charity is determined by three key components; result, reserves and cash.
Thomas Jefferson once said “Never spend money before you have it“. In much the same way, charities must pay attention to not just the surplus or deficit in the year, but also liquidity and cash flow projections as well as reserves, especially unrestricted funds must be at the forefront.
Risk mitigation
Volatile economic environment and global political unrest has created a backdrop of great uncertainty.
Charities, being on the frontline, are subject to more uncertainty than any other sector. In order to weather the storm, charities must identify the key risks. These could come not just from the financial side, but also areas such as staff continuity, cyber security attacks, governance gaps, insufficient skillset of the board and many more.
The more specific to your charity, the better the risk mitigation will be. Remember to consider this for the short, medium and long term. Scenario planning may also be helpful to create a more robust control environment.
Going concern is another key area, given that the board of trustees will need to have reasonable expectation that the charity will remain a going concern 12 months after the signing from the balance sheet date. Put simply, does the charity have sufficient headroom and, even after performing sensitivity analysis on key metrics, are there no bright red flags?
In summary
Financial oversight, resilience planning, maintaining financial health and proactive risk management are critical areas for small charities striving for stability and growth. By fostering a clear financial agenda, understanding cost structures, planning for income streams and proactively addressing risks, small charities can build stronger foundations. These steps are essential for creating impactful, sustainable operations that align with charitable objectives and prepare charities to weather future challenges.
The next step
If you would like to discuss any of the issues raised in this blog, please contact your usual UHY charity adviser or get in touch using the contact form below.
