Understanding and reviewing your charity’s business and financial model underpins monitoring and decision making at any time, but is especially important in the current economic and social context. Effective financial systems and management can provide the information and reports needed to make effective decisions and changes.

The benefits of accounting systems

Charities are required to keep and maintain effective and accurate accounting records. Very small charities with few transactions often use spreadsheets, but if your income is around £25,000 or over and you have several transactions each month, you should consider using accounting software.

Modern cloud accounting systems such as Xero and QuickBooks have become widely used by smaller charities in recent years and typically have the following key features:

• Online access with multi and tailored access
• Database approach allowing setting up of coding structures to meet needs such as for different services, activities and funding
• Direct bank feeds and links to other systems such as for accepting card payments, authorisations and room bookings
• Powerful reporting functionality including ability to set up grant reports
• Ability to attach and store documents such as invoices, contracts and grant agreements
• Secure and backed up
• VAT functionality

Setting up an accounting system

If you do not have a cloud system, you can set up one yourself relatively easily using the software’s guidance or your accountant can do this for you. Make sure that you set up the coding structure to meet your needs. The functionality of each software will vary but this table offers an example.

If you already have a cloud system, make sure it is set up correctly. My recent work delivering a pilot project with Locality, Power to Change and Xero showed that while many organisations have such accounting systems, the coding structure is often not fully set up to meet their needs and available reports are often not used. Read the system’s support articles or videos, or speak with your accountant to help set these up.

The purpose of budgets

Budgets are intended to:

• Set out your organisation’s financial plan for the given period
• Ensure the financial plan is aligned with organisational aims, objectives and targets and is both viable and realistic
• Provide an overall approval mechanism by the leadership and management teams for income and expenditure targets and plans, although each transaction should go through specific approval processes as part of detailed financial controls and procedures
• Monitor the actual performance of the organisation through the financial year (or period) and report differences (often referred to as variances) in management accounts. This can help inform decision making and/or making changes to organisational strategy or plans.

Budgeting in times of uncertainty (risk-based budgeting)

Given the high levels of uncertainty that many charities currently face, it is important to have a realistic budget. There is often a dilemma as to what to include, especially regarding grants and other income that are yet to be secured or even bid for.

A common approach is to categorise income and expenditure by the level of certainty. This can be done by highlighting separately in your budget any income and related expenditure that is:

• Confirmed and known
• Highly likely

Potential income and expenditure should be recorded in a separate pipeline to the actual budget.

The approach can help you understand the underlying risk and robustness within the budget. If you have an accounting system you may be able to upload these (including by category) to help to run management reports, monitor actual performance and make any decisions as needed.

When preparing budgets, it is important to consider different scenarios and how you would manage the impact of key risks such as further energy cost rises or losing key income streams. This can be done as a scenario planning exercise where (like a fire drill) trustees and managers act out a situation where a key risk happened and work through how they would tackle it. This can lead to some very helpful suggestions and approaches.

Presenting cashflow forecasts

Cashflow forecasts set out the projected receipts and payments through an organisation’s bank/cash accounts. They should be based on income and expenditure that is certain and highly likely such as grant and sales receipts, other income, operational and capital expenditure, and loan repayments.

Depending upon the frequency and level of movements through the bank, cashflow forecasts should be on a weekly or monthly basis, ideally at least 12 months ahead (rolling forecast).

As with the budgeting, more than once scenario could be considered. Cashflow forecasts are often more easily understood by board members if presented as a chart.

Preparing your management reports

Experience shows that many organisations who get into financial difficulty have poor accounting systems and management reporting. Having the right software that is set up properly will help produce accurate financial reports. However, the way that board papers are prepared can also make a significant difference to decision making and financial control.

Charity board members will typically focus for only around five minutes on a finance board paper. So you’ll need to set out your key messages clearly and easily.

Effective management reports should:

• Move the thinking of trustees/directors towards the future
• Provide a snapshot of key messages that the rest of the report will expand upon
• Be tailored to who needs to see it, how much they already know, what they absolutely need to know and what decisions they may need to make
• Keep sentences short, covering only one point each
• Clarify the main messages and craft an engaging and compelling summary

Don’t let the figures speak for themselves and avoid talking in numbers. Use charts and diagrams appropriately and make sure the messages they show are clear and simple to understand.

A management report should include:

• Main body of report (two-three pages)
• Strategic objectives and priorities
• Highlights and lowlights of the past month/quarter
• Income and expenditure headlines
• Year to date achievements
• Key non-financial metrics and measures
• Reserves and key risks
• Cashflow forecasts (summary and chart)
• Plans and objectives for the next quarter
• Issues from the previous meeting
• Points to discuss
• Appendices (three-five pages). These should be reports mainly generated from the accounting system for more detail. Typically this will include an income and expenditure summary by service/activity, year-end income and expenditure, and cashflow forecasts and balance sheet.

Neal Trup is a Chartered Accountant who specialises in social and community enterprise. Neal works with smaller charities and social enterprises across the UK on a range of needs, including asset transfer, community housing, improvement and turnaround, strategic planning, management reporting, implementing accounting systems, social finance and community shares.

Neal has developed a range of online diagnostic and assessment tools for major funders in the sector and delivers training on a range of financial governance and social enterprise topics. Neal joined the SORP Committee in February 2020 with a special focus on smaller charities.