Blick Rothenberg

Financial lessons to be learned from the failure of Kids Company

30.11.2016

Trustees are ultimately responsible and may (in certain circumstances) be personally financially liable for the financial stability of a charity. One of the reasons for the high profile failures in the past year is lack of financial management and trustees need to consider how they can fulfil their duties in this respect.

As trustees, you must be comfortable that the organisation is being managed well and that you receive the information you need to monitor performance. Financial information should be of sufficient detail that you can assess the financial position of the charity, but not so detailed that its meaning is lost. Trustees should as a minimum receive; the full management accounts, variance analysis, KPIs, forecasts and scenario planning.

 

Keep the charitable objectives up to date

As the world is ever changing, the needs of your beneficiaries may change with it. With this, there is the danger that initial goals are lost. Trustees should ensure that there are resources available to meet the charity’s aims as set out in its governing document. For example, trustees should be comfortable that:

  • fully budgeted projects are approved by management and trustees before activities are carried out; and
  • all expenditure is approved by management to ensure it is in line with objectives, strategy and the approved projects.

 

Systems, procedures and controls

Fully documented systems, procedures and controls should be in place. These should be communicated to all staff and subject to regular review.

 

It is worth considering whether an annual external audit review of controls is sufficient, or whether an internal audit would provide wider ranging coverage and more immediate feedback on the charity’s activities.

 

Trustees could request an area be looked at as part of the annual audit which would reduce the costs of a review. 

 

Forecasting

Trustees should ensure that full budgets have been prepared, reviewed and approved. These should be realistic and based on reasonable assumptions. Budgets should be monitored and compared to actual outcomes on a regular basis which can highlight potential risks. They should be flexible and react to changes in funding.

 

Additionally, there should not be an over reliance on one particular source of funding. If this source disappears, what would be the impact on the budget?

 

Cash flow

Both cash balances and future cash needs being monitored. Cash flow forecasting should be carried out, which should reflect the charity’s strategy and budgets, and relate to the
planned activities.

 

Sufficient levels should be maintained to cover any shortfalls if urgent expenditure arises or funding is received late.

 

Manage reserves

Charities are required to set a reserves policy and monitor the level of reserves held against this policy. An explanation of the charity’s reserves policy must be included within the Trustees’ Annual Report, together with details of the level of reserves held and why.

 

There is a balancing act between holding too many reserves, which may be off-putting to future donors, and too few reserves, so that the charity cannot weather a storm. Setting the level of reserves requires judgement and should be appropriate to the size and nature of your charity.

 

It may be appropriate for a grant making charity with low overheads to have very low levels of reserves. On the other hand, a charity that is providing services to vulnerable beneficiaries may need to hold a higher level of reserves to ensure that, in event of a funding cut, they can continue to meet the needs of their beneficiaries while new funding sources are found or it adjusts its activities to take this into account.

 

The reserves policy and the level of reserves should both be reviewed regularly. This will ensure the policy is still appropriate and that the actual level of reserves is within
the policy.

 

It is key to a charity’s future success that trustees monitor its financial health and to ensure its objectives can be met. However, they need to understand what they require in order to do so.

 

For further information, please contact Blick Rothenberg partner Mark Hart at mark.hart@blickrothenberg.com