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Financial governance – tips for Trustees

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In the final blog in our series celebrating Trustees Week, Jenny Simpson, Head of Charity Services at Wylie & Bisset, looks at the information Trustees need to demonstrate sound financial governance of their charity.

Managing a charity’s finances is clearly a key responsibility for Trustees.

Management information provided to Trustees, which might include management accounts, budgets and cash flow forecasts, should be appropriate to the charity’s size and the complexity of its funding structure. There is no one-size-fits-all answer.

Where a charity receives restricted income, that is, income where the funder specifies how the money should be spent, it is important that the income is identified as such as soon as it is received and that the accounting records show clearly how that money has been spent. The charity’s management information should include details of restricted income and expenditure so that Trustees can monitor spending of these funds.

Many charities do not track restricted funds during the year, undertaking this only as a year end exercise when preparing the charity’s statutory year end accounts. This is unlikely to be sufficient to demonstrate good financial governance and can lead to unwelcome surprises such as unspent restricted funds which have to be returned to the funder, or big reductions in the charity’s free reserves due to overspends from unrestricted funds.

Unless the charity is very small, management accounts should include a balance sheet showing the assets and liabilities of the charity. Income and expenditure accounts are of limited value unless supported by a (balanced) balance sheet and a review of the balance sheet is useful in identifying potential solvency issues before they become a serious problem.

Similarly, budgets should be supported by cash flow projections which will allow Trustees to spot any potential issues with cash flow well in advance so that they can take appropriate action to ensure the charity remains solvent.

In approving the charity’s statutory accounts, Trustees are required to consider whether the charity will remain a going concern for a period of at least twelve months from the date of approving the accounts. Where there are any uncertainties, Trustees should make mention of this in the Trustees Annual Report as well as the accounting policies in the notes to the accounts. It is difficult for Trustees to demonstrate that they have complied with this requirement unless they have budgets and cash flow forecasts covering the relevant period.

Charity accounting can be complex, but Trustees must ensure that the charity has the systems, processes and resources to ensure that the financial information they receive is accurate, fit for purpose and sufficient to allow them to discharge their responsibilities properly.