The value of investments and any income from them can fall and you may get back less than you invested.

Management Accounts: More than income and expenditure

One of the key financial responsibilities of trustees is to ensure strong financial oversight. In this article we explore whether we have outgrown the traditional management accounts of income and expenditure compared to budget.

WHAT ARE THE DUTIES OF TRUSTEES?

CC3: The Essential Trustee: what you need to know, what you need to do was reissued in July 2015 and explains the key duties of all trustees of charities in England and Wales, setting out what trustees need to do to carry out these duties competently. Trustees have independent control over, and legal responsibility for the charity’s management and administration. They play a very important role and one of their key financial responsibilities is to manage the charity’s resources responsibly. But what does this mean?

Trustees must act responsibly, reasonably, honestly and exercise sound judgement. They must make sure the charity’s assets are only used to carry out its purposes. They must avoid exposing the charity’s assets, beneficiaries or reputation to undue risk and ensure they do not over-commit the charity including taking special care when investing or borrowing. They must also comply with any restrictions on spending funds or selling land.

The trustees are ultimately responsible for implementing appropriate procedures and safeguards and take reasonable steps to ensure that these are followed. If they fail to do this they risk making the charity vulnerable to fraud or theft, or other kinds of abuse, and will be in breach of their duties.

CC25: Managing charity assets and resources provides guidance on how to help manage the cash, property and staff and states that “a charity can only succeed in meeting its aims if it manages its money properly.”

It is expected that trustees will plan, manage and monitor the finances of the charity effectively and while there is a lot of guidance to support trustees, financial management practices vary considerably.

WHAT IS THE SECTOR DOING WELL AND NOT SO WELL?

Most charities are producing management accounts regularly. On the whole financial decisions are being recorded reasonably well through the minutes.

However there is an increasing number of finance directors concerned that while financial information is being presented, trustees are not necessarily engaging in finance. But why not?

In many cases this is because too much information is being provided. Management packs are getting longer as we add more information. Have we arrived at a point where there is so much information that trustees can no longer see the wood from the trees?

WHAT COULD GOOD LOOK LIKE?

If we start off considering why trustees need management accounts. The three objectives are to:

  • Measure current performance;
  • Enable financial decisions; and
  • Evidence fulfilling financial oversight responsibilities.

Typically management packs include an income and expenditure account that compares actual spend to budget. There is often a cash flow forecast and financial projections.

Less often is there a balance sheet, key performance indicators (KPIs) or a statement of financial activities. If we were to start with a blank page and the objectives above, what information might we consider necessary to meet these objectives?

Perhaps to measure performance we would require information on income, expenditure, budgets, variances and explanations. Reports are also required on debts, write offs and provisions as well as a note of borrowings, liabilities and commitments. Looking forward, forecasts and contingencies.

A balance sheet might help to provide some of this information.

The information required to enable financial decisions can be varied. The Charity Commission issued CC27: It’s your decision: charity trustees and decision making in May 2013.

The guidance provides the principles of trustee decision making and it is the expectation of the Charity Commission that trustees must be able to show how they have followed these principles.

Trustees are required to understand the funds of the charity and the legal responsibilities associated with those funds. Rarely is an analysis of funds noting any restrictions included.

At best there may be some reporting through the investment committee if there are invested endowed funds.

Trustees are required to monitor trading to ensure the charity is not funding non profit making activities and if there is trading in the charity, that the small trading tax exemption limit of £50k is not exceeded.

Other areas trustees may need management information on include any breaches of bank covenants or the analysis of other financial commitments.

SO HOW MIGHT WE ENGAGE TRUSTEES IN CHARITY FINANCES: IS A MORE VISUAL APPROACH THE WAY FORWARD?

One option is to provide a single page financial summary that clearly sets out the financial position and performance of the charity together with some key performance indicators as set by the trustees depending on the charity’s circumstances and strategy.

So what might this one page summary look like?

 Income and expenditure
  Budget for month  Actual for month  Budget for year  Forecast for year 
Fundraising income  2,500,000 2,635,000  7,500,000  7,995,000 
Other income  175,000  140,000  375,000  372,000
Total income  2,675,000  2,775,000  7,875,0000  8,367,000
Staff costs  (2,000,000)  (1,995,000)  (6,000,000)  (5,972,000)
Other costs  (600,000)  (675,000)  (1,600,000)  (1,955,000)
Total expenditure (2,600,000)  (2,670,000) (7,600,000) (7,927,000)
 Surplus / (deficit) 75,000 105,000   275,000  440,000

While we said the management accounts are not all income and expenditure, it is hard to consider a key financial summary that doesn’t show the income and expenditure of the charity for the period together with the forecast year end position. And while this reporting would be appropriate for reporting to the Board, the Finance Committee would still require the full details. All information provided in a summary should be supported by full papers which can be requested and have also been seen and reviewed by a sub-committee.

But what might the other three boxes include? The three other boxes should be filled with key performance indicators based on the charity’s individual circumstances. Some examples of things to consider include:

  • Cashflow forecast
  • Loan management
  • Capital expenditure
  • Asset management plan
  • Investments – valuation and performance
  • Appeal income and pledges
  • Fundraising ratios
  • Legacy income and outstanding debtors
  • Grant funding and related expenditure
  • Beneficiaries reached
  • Debtors – outstanding balances, recovery rates and write offs
  • Endowment

CONCLUSION

While the Trustees has overall responsibility for the finances of the charity and safeguarding the charity’s assets, providing a one page summary of financial information rather than multiple spreadsheets should hopefully facilitate good discussions around the key issues facing the organisation. This together with delegation to the finance committee to review should aid the Trustees to concentrate on the key decisions while not getting bogged down in the detail. That said the Trustees still need to receive sufficient information to make those decisions and need to tell the charity’s management if the information they are receiving is insufficient or inappropriate.

Kathryn Burton Partner, Haysmacintyre

Sam Coutinho Partner, Haysmacintyre

The value of investments can fall and you may get back less than you invested.

The information contained in this article is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd..

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