How Trustees Can Demonstrate Sound Financial Governance

This Trustees' Week, our Head of Charities, Jenny Simpson, revisits her thoughts on the most common governance issues seen in charities.  First published in 2018 the issues remain the same today. The final blog looks at the financial information that Trustees need in order 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 or 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 charity has the systems, processes and resources to ensure that the financial information they receive is accurate and fit for purpose.  In the five years since this blog was first published, technology has advanced and there are now a number of software packages suitable for charities, use of which will allow Trustees to discharge their responsibilities properly.

This blog is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as a substitute for taking professional advice in any specific situation. Wbg Services LLP (and its subsidiary Wbg (Audit) Limited) will accept no responsibility for any actions taken or not taken on the basis of this blog. If you would like further advice or would like to discuss any of the issues raised in the blog then please get in touch with your regular Wbg contact or use the contact form on our website.

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