Management accounting: a choice between charity impact and financial resilience?

Driving whilst blindly following a sat nav or walking along the street scrolling Facebook both suffer from similar issues. They are absolutely fine if nothing unexpected happens. But any small hiccup can result in a significant issue. The same could be said for running an organisation with no financial information.

The solution to both the financial challenge and the physical one is exactly the same: look up, identify where you are and be aware of your surroundings. In finance, the tools we have to do this are our management accounts.

We occasionally see charities who think that time spent on management accounts detracts from their mission. As a specialist banker for well over a decade, a charity trustee for two decades and a volunteer for close to 30 years, I would argue it is completely the opposite. Even in the short term, understanding the resources you have is massively important. They allow you to identify potential problems and step neatly round them, rather than discover them in inopportune ways.

What should management accounts look like?

That really depends on the organisation. They should be detailed enough to identify areas of challenge, without listing every small cost centre. All organisations will probably look at four key documents, but their structured will be very individual.

• The income and expenditure account. We might call it a statement of financial activities or profit and loss, but the key is the same – how much income are we generating compared to our costs, and importantly, how do both of those numbers compare to our budget.
• The balance sheet, or statement of financial position. This shows us what we own and what we owe. Mid year, my eyes are always drawn to net current assets as it gives me my first indication of solvency. How much do we own that is close to cash and how much do we owe?
• The cash flow forecast. Continuing the theme of solvency, how much cash do we have how will that change over time and where are the crunch points. Rarely is profitability the reason for charity failure, it is much more likely to be a cash flow issue. So understanding the cash movements is absolutely vital. Once again, we should be comparing these to our forecast.
• The analysis. Perhaps the thing we see missing most often is the "so what?". Variances from budget come in many forms, and understanding what it is, and why it is, can really help. Management should absolutely share their analysis with both those involved in governance and other stakeholders such as banks.

How often should we produce them?

That very much depends on the rhythm of the business. For education, academic periods such as terms makes sense, while for slower changing organisations, quarterly can be a good choice. But for most organisations, the capacity to do at least light touch accounts each month is something to develop. Where there are financial challenges, monthly or even more frequent cash flow forecasts can be absolutely vital, so having the systems to undertake these if needed is useful.

How do these relate to our annual accounts?

We would expect management accounts and annual accounts to come from the same system. Many charities are moving from spreadsheet models to cloud based accountancy packages. These allow organisations to benefit from a range of prebuilt tools and reports; as well as ensuring consistency across accounting and reporting.

What about a budget?

Having management information without a budget is a little like planning a journey without a destination. You have no way to monitor how far you have gone, whether you are on track or whether you are over achieving. There are some key stages to setting a budget, but the two biggest building blocks are interlinked:

• Identifying all the inputs. Understand the range of factors that impact your budget; income sources, regular and non-regular expenditures, committed projects.
• Identifying all the people. Knowing the people who can give you the best input on your budget; including understanding realistic trends in costs and expenditure.

Once you have done this, it is important to document your assumptions and building blocks. Some charities will be able to build spreadsheets to allow modelling changes in core assumptions such as occupancy, inflation, interest rates and staff numbers. Whilst these may take extra time to set up, the ability to model changes will be vital. The NCVO has produced a useful series on budgeting, whilst the WYCAS have a helpful page of tools.

What do we do when the actuals don’t match the budget?

As a starting point, they are unlikely to, as any forecast has some inherent variability and so it is likely there will be differences. The key part is working through three aspects:

1. Is this material? A 25% differential in a line that only equates to 2% of your income is unlikely to be material to your organisation
2. What kind of difference is this? Broadly, we can drop these into a number of groups, although sometimes something might have elements of more than one
3. Is this a positive or negative trend? Is this showing an inability to match planned cost levels or income? This isn’t always as easy as the direction. For instance, if you are underspent because you cannot find a contractor to do your five-year fixed wiring check, that is a significant challenge.

Understanding these factors will help inform whether action or monitoring is needed.

And finally, it’s not just the role of the treasurers or finance team

One of the most important parts of management accounts is that they communicate the main challenges to the management team and the trustees. Understanding management accounts should be something that everyone can do. Only then can they underpin effective decision making and support the organisation's mission.