Sage and Charity Digital have released a new report investigating the state of organisational financial literacy in the UK charity sector. Here are five of the main lessons
This article is sponsored by Sage Intacct – the non-profit financial management platform that lets you pursue your mission more efficiently with a sophisticated multidimensional database that lets you aggregate transactions and activities across your non-profit organisation.
Many areas of charity operations have undergone a process of digital transformation as a result of the COVID-19 pandemic. But while the transformation of fundraising, service delivery, and communications have all been the focus of discussion, charity finance management has not received as much attention.
Charities with financial difficulties may prioritise addressing the symptoms of their problems in a difficult fundraising climate. But ultimately it is organisations with strong financial management and sound processes that will be able to address the root causes of their problems. These organisations will be in the best position to weather difficult times and build towards a more sustainable future.
There are currently a number of worrying projections regarding the financial health of the charity sector. Unfortunately, organisations are having to make difficult decisions to be able to continue to provide their services and more than one-in-ten charities remain at immediate risk of closure.
Studies show that the charity sector continues to produce insufficient impact reporting. A Charity Finance Directors’ Group study found that while more than half of charities reported on output and outcome, broader impact reporting was a far less common practice. Until these practices become more common, the sector will remain on financial life support.
The Sage Organisational Financial Literacy (OFL) report examines the current state of OFL and impact reporting in the UK charity sector. It explores the root causes and proposes solutions for both individual organisations and the sector as a whole.
Here are the five main takeaways from the report:
Charities operate under a range of pressures without parallel in the world of business.
While all organisations rely upon the trust and goodwill of the people they work with, charities feel this pressure more keenly than corporate organisations. This is largely because support for a charity is an emotive decision that involves a personal sense of connection. People donate to charities because they are supposed to embody certain ideals. If they fall short of these then supporters will be more reluctant to donate in the future.
Pressure from funders places non-profit operations under a spotlight of constant scrutiny that is exacerbated by frequent shortages of financial and physical resources. Social media amplifies any perceived shortcomings; a clarion that resounds louder in the charity sector’s enclosed digital spaces.
This creates a need for accountability. Charity professionals must be answerable to stakeholders and donors. Funders will want to know how the money is spent and will expect that it is used as prudently and efficiently as possible.
Charity impact is usually measured by engagement with service users and the ability to meet targets set by trustees. Because stakeholders are often not involved in the day-to-day running of the organisation, they require information on financial performance in order to make decisions and evaluate the organisation’s work.
Charities that cannot provide impact reporting will be a far less appealing prospect to funders than organisations that can use detailed projections and costings to provide a clear plan.
The report found that charities frequently cited a lack of resources as a key obstacle to better finance management.
Without proper allocation of resources, a non-profit organisation’s various activities will not operate successfully. Without prudent financial planning, non-profit organisations will struggle to plan existing activities or pilot new ones – which in turn will lead to further financial insecurity.
The report found that charities were in severe need of improved financial processes and that appropriate resourcing is key to improving financial understanding and skills among charity finance staff.
If a charity under-invests in financial planning due to a lack of resources, they will be doomed to repeat this cycle as their resources become stretched as a result of insufficient planning.
Many charities do not have the resources to employ a trained finance professional in a full-time role. This means that the finance function will often be filled by someone without prior training in finance management, or that finance duties are undertaken alongside other assignments by a non-finance specialist.
It is not surprising that the levels of confidence and financial understanding among these workers are substantially lower than among trained finance professionals.
Among trained finance professionals, 57% surveyed said they had a high level of confidence in all areas of accounting, bookkeeping, and finance management. Among non-trained staff fulfilling the finance function, this figure plummeted to 26%, with a further 16% saying they had little to no confidence in all areas.
A substantial percentage of these workers cite their skills as either low or basic, with less than 30% having capabilities extending to financial planning. This indicates a reactive approach to managing non-profit finances among organisations lacking dedicated financial professionals. Among all those surveyed, just 38% of respondents considered themselves confident of their skills across all areas.
Of all the obstacles to improved finance management, capacity was by far the most commonly cited.
This issue related to the amount of work that charities are able to do, as a result of a shortage of resources (time, money, and skills).
This does not only apply to smaller organisations. The survey found that almost all organisations surveyed encountered capacity issues at some point in time. Capacity issues impacted all skills levels, missions and organisational set-ups.
The report found four main causes of capacity issues:
The report found that automation is the key to solving issues of capacity and a lack of knowledge.
Currently, 39% of charity finance professionals have a sole reliance on Microsoft Excel or paper-based accounting methods. These practices are outdated, time-consuming, and rife with opportunities for error.
Automation can ease the burden of time-consuming tasks, allowing resources to be channelled into other areas. This means charities can work more productively They can invest in the more advanced financial practices that will give them a better chance of a sustainable financial future.
But there are caveats to automation as a solution. Training will be required. Many charity workers find accountancy software confusing and difficult to understand.
Even competent accountancy software users expressed a desire to learn more about the products that they use in order to unlock the full range of these products’ functionality.
Download the Sage and Charity Digital OFL report here