How to financially empower your trustees

The Charity Commission lists six responsibilities of trustees:

• Ensure your organisation is carrying out its purposes for the public benefit
• Comply with your organisation’s governing document and the law
• Act in your organisation’s best interests
• Manage your organisation’s resources responsibly
• Act with reasonable care and skill
• Ensure your organisation is accountable

The last of these is overtly about finance and includes the need to produce and file statutory accounts. The bulk of this responsibility typically falls to the treasurer (working with the finance manager or other staff as appropriate). However, the other trustees are still required to sign off on accounts and many of the other five responsibilities require an adequate grasp of finance.

For example, managing your organisation’s resources responsibly requires an understanding of the finances and their role in supporting the organisation in carrying out its purpose. Similarly, if a trustee is to act with reasonable care and skill, they need to understand their organisation’s finances too.

However, all too often trustees find the finances of their organisation hard to engage with, which can compromise their role as a trustee and make it hard for the board to function effectively. Strategic and operational discussions in the absence of a sound financial understanding can be ineffective and potentially even damaging to the future of the organisation. It can also make the role of the treasurer difficult as they are required to shoulder a disproportionate responsibility.

In this context, it is important for all trustees to deepen their understanding of the finances of their organisation.

This short guide outlines a series of steps to help staff acquaint trustees with their organisation’s finances. We’d recommend a briefing session for all new trustees (and those requiring an update) supported with appropriate presentation materials and relating key financial concepts to the specifics of the organisation.

Step one

Establish the current level of financial knowledge and understanding of the trustee(s) and modify the following content appropriately (points 2 – 9). Depending on the level of knowledge, it may be appropriate to split into more than one session, e.g., one session to focus on finance basics as per point 2, and a further session to discuss the specific areas which relate to their organisation as per points 3-9

Step two

Explain key terminology:

Budgets

• Always look ahead. Financial information is out of date by default. It is telling us what has happened. This information needs to be used as a platform for understanding the current status of the organisation, but this needs to be looked at with one eye on the future
  
• Forecast Budgets give us a picture going forward of where we think we will be and what money we need to target, etc.

Statement of Financial Activity (SoFA) or Receipts and Payments Account

• The SoFA (sometimes called the Income and Expenditure Statement or Receipts and Payments Account) corresponds to what commercial businesses term the profit and loss (P&L) statement. The SoFA is a financial report that summarises the income and expenditure, and gains and losses incurred during a specified period, usually a month, a fiscal quarter or year

Trustees might also be referred to our short video on “The fundamentals of finance for non-profit organisations”.

Step three

Provide an explanation for every significant income stream:

• Where the income comes from (types of funder / commissioner / donor and for NPOs that trade, customer)
  
  
• Activity that is performed to secure the income (delivery of grant-funded projects, commissioned services, supply of the product if trading etc.)
  
  
• The expenses associated with delivering each of the activities identified above (any major contracts / sub-contracts and cost of staff delivering, cost of materials, travel etc.). In the commercial world this would be termed cost of sales
  
  
• Historical and budgeted income from the stream

• Any restrictions applying to the income stream

Step four

Explain all other cost categories (fundraising and marketing costs, overheads etc.)

Step five

Provide details of any major contracts not explained previously (including property leases)

Step six

Explain balance sheet terminology (also known as statement of financial position)

• Fixed Assets - A fixed asset is a long-term tangible piece of property or equipment that the organisation owns and uses in its operations to generate income. Not expected to be consumed or converted into cash within a year
  
  
• Debtors - A debtor is a company or individual who owes the organisation money. Sometimes referred to as accounts receivable or receivables

• Cash - Money in the bank
  
  
• Creditors - A creditor is a person or company to whom money is owing. These are typically split between:

• Amounts falling due with one year – sometimes referred to as accounts payable or payables
  
  
• Amounts falling due after one year – sometimes referred to as Long Term Liabilities

• General Fund – Money the organisation has available to use freely to further its charitable aims. Sometimes referred to as Unrestricted Funds

• Restricted Fund – Money that is given for a specific purpose and is ring-fenced as such. Sometimes time constraints are also imposed

Step seven

Walk-through the organisation’s balance sheet covering each of the categories outlined in step 6.

Step eight

Explain how the management accounts map to the statutory accounts.

• The management accounts are produced on a regular basis (ideally monthly, but sometimes quarterly is sufficient) to support the effective management of the organisation
  
  
• The statutory accounts are produced after the end of the financial year to provide a formal record of the financial activity and position of the organisation
  
  
• The two sets of accounts may have different levels of detail and aggregate and separate costs in different ways. Explain any of these differences

Step nine

Outline any other points of financial significance to the organisation.