Charity trustees carry a lot of responsibility – they are ultimately responsible for everything the charity does, but charity finance can be a tough subject to get your head around. This can seem daunting when you are acting in a non-executive capacity.
In the run-up to our Charity Accountants’ Conference, which has been delivering expert sessions on charity financial affairs for 25 years, we ask; as a trustee, what questions should you ask about finances?
Understand the operating model
You need to understand some fundamentals about the charity, so ask questions such as:
- How are services paid for? Who has a stake or an interest in ensuring the charity does its work? How are services funded?
- How are costs linked to income and what are the key drivers for costs? In other words, what would cause costs to increase or decrease? It is useful to understand whether costs are fixed or flexible and therefore how much control you have over expenditure.
- Are we reliant on one source of funding? If a charity depends on a sole source for the majority of its income (such as a local authority) then it is vulnerable to changes in the economic and political temperature. Ideally, charities should have a diverse income portfolio.
Ask questions to get early warning of potential problems
Charity trustees should look out for some warning signs that all is not well with the financial strategy of their charity:
- You need to understand how the relationships with funders are managed and how changes in the external environment could affect your charity’s funding.
- Do you have a number of funding streams ending at the same time? This is a predictable risk but needs to be managed well.
- Suggestions that the charity should start new activities that will generate a loss in the short-term, with fabulous financial returns later. This is only a viable strategy when you have sufficient reserves.
- Beware big new contracts as these will have to generate enough income to cover the increase in capacity as well as the direct costs. Most charities are tempted by the income a contract represents but you really need to focus on the contribution it will make to overheads and the likely increase in overheads. If the contract is only for three years, then you could find the charity has scaled up in terms of overheads only to suffer a drastic reduction in funding.
- In charities, overtrading takes a slightly different form, typically using the funding for new projects to finish work on existing projects. So, in effect, robbing Peter to pay Paul. The problems become apparent when new projects dry up and there is insufficient funding to finish projects.
Other questions to consider
- Where does the demand for the charity’s services come from? Who are the beneficiaries or service users?
- How do you know how well the charity’s services meet the need – do you see feedback or evaluations?
There is no such thing as a dumb question! Don’t be put off by finance jargon – keep those questions coming.