Financial Management & Charity AccountsDay 2

uday@redochre.org.uk

Financial communications

•Need to monitor activities•More importantly understand what the figures are “saying”•Then take action!•For instance monitoring cash flow to ensure that a crisis does not ensue•Using ratios to monitor and act on different areas of activities:

• Occupancy rates – if you are operating a housing charity, this will allow you to decide the level of occupancy you need to maintain

Taking decisions

•Return on fundraising:This allows you to compare different methods and decide on the most effective one=Funds raised x 100%

Cost of doing this•Use this method to complete the Fundraising exercise

External Reporting

•Some form of external financial reporting is required of all organisations•This could be to investors, funders, key stakeholders, banks, lenders, suppliers, landlords etc.•All limited liability companies have to supply accounts to Companies House, Financial Conduct Authority (Co-Ops) or the Charity Commission (CIOs)

Basis

•Legislation is mainly aimed at commercial organisations•The reporting is known as Financial Accounts•These allow a degree of transparency•Information is over-arching and not operational•The information has to be provided annually All limited liability companies have to supply accounts to Companies House, Financial Conduct Authority (Co-Ops) or the Charity Commission (CIOs)

Legal Framework

International accounting standards

CompaniesAct

CharitiesAct

SORPStatement of

recommended practice

Charity Commission & Cabinet

Office

Commercial company accounts

Financial accounts

•Financial accounts summarise the activities of the previous 12 months•They provide information on a company’s activities and ability to manage assets and risk•These do not include operational information – though they are based on this

Commercial financial accounts

•At their simplest the financial accounts consist of

•An income and expenditure account (or Profit and Loss account)•A Balance sheet•A cash flow statement•A directors report

Profit & Loss Account

•This is a summary of transactions over a stated period•Usually the previous 12 months•Information formatting is mandatory•Disclose level of generated income and profitability

•Income•Direct costs•Other costs•Profit before tax

Profit & Loss Account 2

•Profit belongs to the owners of the company (investors)•Profit not distributed (as a dividend) increases the net worth of the company•The profit is used to create or buy assets or is in the form of cash and is added to the accumulated profits brought forward from prior years

Balance Sheet

•The balance sheet is a record of an organisation’s net worth, this is the difference between:•Assets

•Something you own, and•Liabilities

•What you owe someone else•The balance sheet is stated for a specific date – usually the financial year end

Balance Sheet

•Fixed assets •those used on a long term continuing basis

•Current assets•those you expect to sell or convert into cash within 1 year

•Current liabilities•amounts you expect to pay within 1 year

•Long term liabilities•amounts payable not within 1 year

Balance Sheet – Equity/Net Worth

•Capital invested•money introduced by owners

•Retained profit •what has been earned/saved by the company

•The equity amount does not belong to the company it belongs to the owners

Profit & Loss vs. The Balance Sheet

•The balance sheet captures the timing difference between items in the profit and loss account and actual cash movement, the differences are usually:

•Timing differences•Loans & Loan repayments •Fixed assets movements•Depreciation/Amortisation•VAT

Commercial Accounts Exercise

•Please undertake the NewCo exercise to complete a simple set of financial accounts

Charity Accounts

•Charities are funded through “Gifts” & operating activities•You cannot invest in a charity•Unused income is not a profit•Not available for distribution but for continuing public benefit delivery•These are called surpluses•At a financial year end surpluses are reflected within the various reserves of the charity

Charity Accounts - 2

•Resources received, that is cash and non-cash items, can be either:

•Restricted: can only be used for a specified activity•Unrestricted: can be used as the trustees/ management see fit

•New SORP wants to distinguish between endowments (restricted “investment”) and “immediately usable” resources• So measuring resource sourcing, allocation & utilsation

Charity Accounts - 3

•Unrestricted funds can be used towards non-project related or “Core” costs•Available unrestricted funds can be used for supporting shortfalls in restricted funded projects - but not the other way round•Charities increasingly diversifying income sources to generate more unrestricted funds

Types of accounts

•Receipts & Payments•Cash in cash out basis - simple

•Accrual •Have to take into account items not collected or not paid within the period i.e. Have to “accrue” for these amounts•This methodology gives a more accurate picture of a charity’s activities & performance

Legal structures

•2 types of charities•Voluntary association – not legally recognised and trustees/ management committee personally liable for all activities•Limited liability companies

•Companies Limited by Guarantee (& then receive charity registration)•Charitable Incorporated Organisation•Company Limited by Shares/ Royal Charter/ Co-Operatives

AdministrationWhat Who

Accounts preparation All charities

File within 10 months Unless non company charity & income 

Format

•Accounts need to follow SORP format•They need to include a Statement of Financial Activity (SoFA), a balance sheet, a cash flow statement & the Trustees Annual Report•There need to be accompanying notes to explain the financial statements

Reading accounts

•Common format eases understanding•Should inform on:

•Performance•Delivery•Use of funds•Management of funds•Viability & sustainability•Investment decisions•Engagement & trading

•This is often done using ratios to test cash flow, speed of collecting debts and settling liabilities etc.

Income & endowments

Categories Types What?

1. Income from Donations & Legacies

Income from donations & legacies

grants/legacies/donations(no expectation of a service in return)

Other trading activities Non charitable trading activities/ fundraising activities

Income from investments interest/divis/rent

2. Income from charitable activities

Fees or grants rec’d specifically to deliver services & activities

Grants/fees(Contractual to further charitable objects)

3. Other income Whatever does not fit above Unusual items e.g. sale of fixed assets

© Red Ochre 2016

SoFA Recommended Format

Explanation Endowment£

Restricted£

Unrestricted£

Total£

Last Year£

Sources of Income + + + + +

Matched Expenditure - - - -

Surplus/Deficit = = = = =

Reserves B/Fw’d + + + + +

Reserves C/F’wd + = = = =

© Red Ochre 2016

Expenditure

Match type of incoming Resource What is included

1. Expenditure on raising funds Costs of generating donations and legacies (fundraising / publicity). Cost of goods sold. Investment management costs

2. Expenditure on charitable activities Includes governance costs which will be a separate component of support costs

3. Other expenditure Anything else

4. Support costs Costs that allow other activities to be undertaken shown in the notes to the accounts for those reporting on an activity basisGovernance costs now to be included within this note

© Red Ochre 2016

Balance sheet

£ £

Fixed Asset +

Current assets

Cash/Debtors +

Current Liabilities

Creditors -

Net Assets +

Long Term Liabilities -

Net Worth +

© Red Ochre 2016

Statement of Cash FlowsCash flows from operating activities: Total Funds

£Last Year

£Net cash provided by (used in) operating activities- SoFA net funds adjusted for non cash items and non operating

items

X X

Cash flows from investing activities:Divis, interest, rentSale of assets & investmentsPurchase of assets & investments

Net cash provided by (used in) investing activities

XX

(X)X

XX

(X)X

Cash flows from financing activities:Repayment of borrowingCash inflow from new borrowingReceipt of endowments

Net cash provided by (used in) financing activities

(X)XXX

(X)XXX

Change in cash & cash equivalents in this reporting periodCash & cash equivalent at beginning of the period

XX

XX

Cash & cash equivalents at the end of the reporting period X X

© Red Ochre 2016

Reconciliation: Net movement of funds to cash flow from Operating Activities

Current£

Last Year£

Net movement in funds as per SoFA X X

Adjusted for:Depreciation chargesDivis, interest and rents from investmentsLoss/ (profit) on sale of assets & investments(Increase)/ decrease in stocks(Increase)/ decrease in debtors(Increase)/ decrease in creditors

X(X)(X)X

(X)X

XX

(X)X

(X)X

Net cash provided by (used in) operating activities X X

© Red Ochre 2016

Reserves

FUNDS OF A CHARITY

UNRESTRICTED INCOME FUNDS

RESTRICTED FUNDS/SPECIAL

TRUSTS

GENERAL INCOMEDESIGNATED ENDOWMENT

© Red Ochre 2016

Endowment Funds

•Restricted fund held on trust for the charity as a capital fund

•If have to maintain whole of fund –permanent endowment•If discretion to convert to income –expendable endowment

•Receipt and changes of endowments have to be disclosed on the SoFA

Reserves disclosure

•Have to describe reserves policy•Why reserves held – future intention•Ability to avoid financial problems

–CC guidance – should maintain 3 months of unrestricted reserves–These are the costs to close charity down if necessary, e.g. Redundancy, or–Buffer to secure further funding

Charity Accounts Exercise

•Please undertake the New Health exercise to complete a simple set of charity financial accounts

Trustee’s Annual Report

Responsibility of the trustees Essential marketing document but has to be

audit compliant What most stakeholders will read The trustee report expands on what the

charity has done and what it will do in future (strategy/ public benefit)

Risk policy Reserves policy It is “colouring” in the bits that the figures

cannot tell

© Red Ochre 2016

TAR Framework

Who are we? Reference and administrationHow do we work? Structure, governance and

management

What are we doing? Objectives and activities

What did we do and how well did we do it?

Achievements and performance, use of KPIs

How did we afford it? Financial review

What are we planning? Plans for future periods

Managing risk Risk assessment

What else do we look after Custodianship