How financially capable is the UK charity sector?

Current financial processes

 

There are several reasons for the failure to produce sufficient financial documentation, but the primary issues relate to capacity. In many NPOs (primarily smaller organisations) finance will not be a priority. This can manifest in a number of different ways.

 

Finance duties may be undertaken by a member of another team, in tandem with their other duties, or by a part-time employee or volunteer. Both of these can result in insufficient time being dedicated to finance activities. Even if there is a dedicated finance worker in the organisation, they are often not a trained financial professional. This can also result in low-quality or naïve financial records being produced.

 

These organisations will be at a severe disadvantage. For one, irregular, infrequent, or otherwise weak financial record-keeping (or a failure to monitor financial activity in real-time) will lead to a shallow dataset. This will mean that decision-makers will not be properly informed and are more likely to make financial decisions that are unsustainable for the organisation.

 

These organisations will also be a far less appealing prospect for funders. All organisations must be able to explain to their stakeholders how the money is being spent. For a corporate organisation, this will consist of reporting to a board of directors. For an NPO, this will most likely consist of reporting to a board of trustees, as well as directly to donors, service users and other funders.

 

While a business will be judged on its ability (either at present or in the future) to turn a profit, an NPO will be evaluated on its ability to provide value to its service users. Without sufficient impact reporting, it will be impossible to demonstrate this value. The organisation will lose accountability, and funders will lose interest.

 

 

Confidence in trained vs non-trained staff members

 

One of the key takeaways from the report is the disparity between the confidence and ability of trained and non-trained finance staff.

 

Non-trained finance staff reported lower confidence across the board. 16% of those surveyed reported ‘low confidence in all areas’, with a further 12% responding that they were ‘confident in bookkeeping only’.

 

This is the lowest level of Organisational Financial Literacy outlined in the report and means that these workers are only comfortable with basic financial processes such as payroll and expenses.

 

One-quarter of non-trained finance staff surveyed reported that they had ‘some confidence in two or three areas’. This means that a total of 53% of non-trained finance staff were not proficient enough in their role to be able to fulfil the finance function effectively and produce sufficient reportage for sustainable planning and responsible financial decision-making.

 

A further 20% stated that, although confident in some areas, they lacked confidence in the crucial area of financial planning (11% responding that they were ‘mostly confident in all areas’, and a further 9% stating that they were ‘confident in all but financial planning’).

 

This means that just 26% of non-trained finance staff regard themselves as having ‘high confidence in all areas’ of their role.

 

This is not just a skills shortage – it is a skills crisis.

 

As you might expect, the numbers around trained finance staff make for very different reading. Just 3% of trained finance staff reported ‘low confidence in all areas’, with a further 9% reporting that they were only confident in the basic processes of bookkeeping.

 

With a further 10% reporting ‘some confidence in two or three areas’, this means that just 22% of trained finance workers reported that they were not proficient enough to fulfil the finance function effectively – as opposed to 53% of non-trained finance staff.

 

On the other end of the scale, 57% of trained finance staff reported ‘high confidence in all areas’. This shows that charities with trained finance staff will be at a sizeable advantage when it comes to producing documentation to compete for funding.

 

When it comes to financial processes, it is surprising that the same number of trained finance staff responded ‘none/don’t know’ as their non-trained counterparts (3%). They also saw similar numbers respond that they only produce annual accounts (2% vs 3%).

 

It is when we look towards more advanced financial processes that differences become apparent. Non-trained finance staff are far more likely to produce bank statements but not quarterly accounts than trained finance staff (31% vs 21%). In total, 60% of non-trained finance staff produce monthly reports – significantly less than the 72% of trained finance workers who produce such reports.

 

Organisations that are able to produce such reports will be at a great advantage when it comes to decision-making, as they will be able to adapt quickly to a crisis or other fluctuation in revenue. This ability to manage change makes these organisations more sustainable.

 

 

How can the sector improve?

 

When survey respondents were asked which areas that they wanted to improve upon, more than half mentioned an aspect of financial management (53%). This is precisely the number of non-trained finance workers who reported they lacked the proficiency to carry out their role to a high standard.

 

A high number of respondents (39%) also cited strategy and planning as an area they wanted to improve, which suggests that there is at least an understanding within the sector that strategy and planning are crucial areas for financially-sustainable organisations.

 

If a high percentage of respondents identify the importance of improving these areas, then it implies that capacity is the issue preventing them from doing so. This can be improved through better use and understanding of software, which was cited as a desirable improvement area for 35% of respondents.