In many ways, running a charity is like running any other organisation. The leaders of the organisation need to know where the money is coming from, and that they have enough to meet the organisation’s liabilities when they fall due. In fact, most sources suggest that the size and complexity of the organisation make far more difference than sector, funding source, or purpose.

There are, however, some financial issues that are particular to charities. For example, registered charities may be required to submit accounts to a regulator each year—and the regulator may set out particular forms that accounts must take, or information that must be included. This may be different from company accounting standards. This page discusses these differences, and what those running charities need to consider.

So Far So Similar?

Anyone running any organisation, of any size, will be familiar with the financial challenges involved.

You need to have enough money to cover your needs, and you should have a good idea of where that money is coming from and when it will arrive. For businesses, this might be a projection of your income from sales and other sources, or when investors plan to provide money. For charities, it is a projection of your fundraising expectations, income from activities like shops, or the grants that you expect to receive from grant-making bodies.

You also need to be able to provide explanations and accounts for both your income and your expenditure. The precise requirements will be affected by the size and nature of the organisation—but the basic need is the same for both businesses and charities. You therefore need to keep records of your spending and income to draw on for accounting purposes.

Next, you need to know that you will have enough money in your account to cover liabilities when they fall due. It is no good, for example, if your rent falls due before your grant money arrives. This is the issue of cash flow, and it has brought down more businesses than any other.

There is more about these issues in our pages on Avoiding Common Financial Mistakes in Business. Anyone starting to run a charity would do well to read this page.

There are, however, some financial issues that are specific to charities.

Charities do not make a profit. All the money that they receive, including from sales of goods, has go to back into the charity, and be used for the charity’s designated purposes. There are also particular issues concerning the sources of money and the uses to which funds can be put. Finally, there are legal processes that may vary for charities, such as insolvency.

Categories of Charity Funding

There are two main categories of charity funding, each of which is divided into two sub-categories:

Restricted funding is any funding where the donor has restricted the ways in which the money can be spent

When people give money to a charity, they can specify how it can be used.

For example, many government grants can only be used for the provision of specific services. That might include the administration of those services, for example, to pay for someone to prepare the accounts for the service. However, they often cannot be used to fund the general administration of the charity.

Similarly, individual donors may restrict the possible uses of funding. They may, for example, give money to help fund a new building, or to provide specific resources. They might specifically state that when they make the gift, or they may give money in response to a specific appeal. If this is the case, you cannot use that money to fund something else—even if your original appeal raised more than you needed.

In practice, this means that money raised in response to a specific appeal must be accounted for separately from the charity’s more general funds. This may mean the use of separate bank accounts and systems, to avoid any confusion. It also means that appeals for funding need to be carefully worded to avoid tying up funds unnecessarily.

Some charities also have restricted endowment funds. These are funds that are invested to support a non-profit organisation. Charities are generally required by law to keep the assets, and only use the income.

Unrestricted funding is all other money available to the charity

There are two types of unrestricted funding.

The first is general funding: money that is available for spending on the charity’s purposes. This is the most useful type of funding for most charities, because the trustees can decide how to spend it to best deliver the charity’s purpose.

The second is designated funding. This is money that the trustees have set aside for a particular purpose. It is usually drawn from general funding, and can be returned to that pot if it is later decided that the designated spend is not required.

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Financial Responsibilities of Charity Trustees

Our page on Being a Charity Trustee explains the key responsibilities of charity trustees. There are three that are particularly important in financial terms. They are:

• To act in the best interests of the charity;

• To manage the charity’s resources responsibly (and particularly, within this, to safeguard the charity’s assets); and

• To act with reasonable skill and care.

All trustees share these responsibilities, even if there is a designated treasurer.

When you are running a charity, particularly as a trustee or director, you therefore need to understand the finances.

You might not understand every last nuance, but you need to know whether there are enough funds in the bank to cover liabilities. You also need a bit of an eye for potential problems, such as a drop in income, or an expected rise in expenses—which means being able to read accounts and understand trend graphs (you may find our page on Graphs and Charts is helpful).

You also need to be prepared to ask questions of any administrators or staff, to make sure that you have a full picture, and that contingency plans have been put in place to manage risks (there is more about this in our page on Risk Management).

On a personal level, it will help to be familiar with the concepts of investment and borrowing. This will allow you to consider and discuss the use of assets more competently.

Finally, you will need a good understanding of the charity’s work, and particularly its operations as well as its purpose. This will ensure that you can consider and balance possible uses of funds to act in the best interests of the charity in both the long- and short-term.

Managing Potential Financial Problems

It is particularly important to have early warning of any potential financial problems. This will allow you to take prompt action to address them, and hopefully avoid insolvency.

This early warning can best be achieved through regular and reliable monitoring and reporting on the charity’s financial situation.

Like businesses—and, indeed, individuals—charities have a number of options to improve their financial situation once problems have been identified. These include:

• Spending less money, for example, by making some staff redundant, cutting operations in some way, or sharing resources with another charity to take advantage of economies of scale;

• Finding some additional sources of income, such as additional donations or grants, or by launching a fundraising appeal;

• Reviewing your plans to free up designated funding. You may find that you can reallocate some general funding to address particular problem areas or fill gaps in your funding.

It will be up to the trustees to decide what action to take in the event of financial problems or shortfalls. Other options include closing the charity, or merging with another charity with a similar purpose. This might be a good solution to the issue of scarce resources.

However, sometimes it is impossible to resolve financial problems in charities, and insolvency threatens...

Charities and Insolvency

Like businesses, charities can also run out of money, and have to stop operating.

Insolvency is a complex legal issue. Fundamentally, though, your charity may be insolvent if:

• You are unable to pay your debts or liabilities when they fall due even though overall you have more money coming in than going out (this is an issue of cash flow); or

• Your debts or liabilities are greater than your assets.

If the charity is at risk of insolvency, the charity’s trustees are responsible for paying as many of the charity’s debtors as possible. This may mean stopping some of the charity’s operations or activities to save as much money as possible.

It is important to do this quickly, because a charity cannot continue to trade when it is insolvent.

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In Conclusion

The fundamental financial principles of operation are very similar for charities and businesses.

Both need adequate funds to cover their activities, and they also need the correct cash flow to operate. However, charities are more restricted in the ways that they can use money.

It is therefore essential that those running charities are familiar with the rules and regulations governing charitable funding, to avoid any problems. It is, however, also true to say that perhaps one of the most important skills is to appreciate when to call in professional help for financial problems.

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