How to read charity balance sheets

Dispelling the myths around charity finances, charity balance sheets are opportunities for charities to show good governance and transparency. There are plenty of digital resources that can help leaders understand their financial operations and, here, we provide a guide to some of the best. 

What is a charity balance sheet? 

Balance sheets are summaries of all your assets and debts at a particular moment. Financial software providers Calxa say: “While the Profit & Loss report shows how much money you’ve made over a period of time, the Balance Sheet (also known as the Statement of Financial Position) lists your assets, liabilities and equity as they are valued at a particular date.” 

Note that the balance sheet alone demonstrates a static position and doesn’t show how things change over time. Calxa recommends having something to compare it to in order to understand your financial position more clearly and to identify what’s changed.  

For most charities, balance sheet reporting is prepared as a collaboration between the finance team and board members and trustees. Ultimately, the leadership teams need to sign-off on the accounts. 

As with many businesses, charities have a legal obligation to report on their finances. These types of reports are normally released and available to the public. 

In the UK, the Government sets out what needs to be prepared and separates what needs to be reported by charity size. 

The reports vary from accounts, annual reporting, and returns. Both registered and non-registered charities need to make accounts available if asked. 

What to look for on a charity balance sheet 

Put simply, charity balance sheets and accounts tell readers about charity activities. For small charities, an account summarising the financial ins and outs, along with the assets and liabilities, needs to be prepared. 

For charities with an income over £250,000, accounts need to be prepared on an ‘accrual’ basis and contain a balance sheet, statement of financial activities (SoFA), and explanatory notes. The accrual basis of accounting means recording revenues and expenses when they occur as opposed to when money is exchanged. 

The National Council for Voluntary Organisations (NCVO) offers a wealth of advice for reading charity accounts and balance sheets. The organisation says to watch out for common pitfalls when looking at charity activities. Charities with shops, for example, need to account for how they are run. The basics include spending on goods, donations and the cost of running the shop. 

Funding is also important. Charities need to set out the changes in restricted and unrestricted funding. Thirdly, tax relief – including Gift Aid – needs to be recorded, and any public money, and what it goes to supporting, should be noted too. 

Charity audit firm Sayer Vincent offers good advice for assessing charity balance sheets. It says the key to understanding the activities is to look at the statement of financial activities. In more common terms, the SoFA is the statement of profit and loss. Fund accounting is the basic principle behind the financial reporting. 

Here, the emphasis is on how charities have recorded resources, assets and debts. How the charity has classified income and spent it reveals the health of the finances. 

Digital resources for charity teams 

To get abreast of basic finance and accounting resources, charity teams should check out some of the below authoritative resources. 

CALXA 

While Calxa’s financial software is aimed at automating and simplifying your financial reporting, it also offers free charity-specific resources that may help too.  

Among its e-books, charities can find advice on budgeting, cash flow analysis and forecasting, as well as plenty of video tutorials and webinars on how technology can support your financial management.  

You can also find Calxa’s software on the Charity Digital Exchange, enabling charities to purchase it at a discount.  

CHARITY COMMISSION OF ENGLAND AND WALES 

For technical advice and reporting templates, the UK Government and Charity Commission of England and Wales digital resource offers comprehensive guidance for large and small charities. To make shorter work of the vast resources, we suggest taking a look at the section related to ‘managing charity finances’ and ‘example trustees’ annual reports and accounts for charities’. 

NPC’S LITTLE BLUE BOOK 

The NPC little blue book is a great resource for charities evaluating their own finances. The framework sets out six areas to watch out for. They are activities, results, leadership, people and resources, finances and ambitions. 

The guidance is for both charities and donors in terms of what can be improved. Note, many of the results could also be included in the full set of charity annual accounts.  

SMALL CHARITY FINANCE 

The Charity Finance Group has dedicated online resources to helping smaller charities manage their finances. The Small Charity Programme includes webinars on cash flow forecasting, budgeting, and management accounts. 

CHARITY FINANCIALS 

For news and insights on issues affecting charity finances, check out Charity Financials. The resource is free for charity professionals. The ‘Insights’ section could help leaders identify issues affecting charity finances. 

RESOURCE CENTRE 

Dedicated to community groups, this online repository has information summarising broad financial and governance topics. For those leaders looking for specific information on reporting on financial activities, the section on ‘Charity reporting and accounts’ provides a good briefing on what to do according to charity size. 

NCVO 

Aimed at new trustees and board members, the NCVO’s digital resources tackle the task of charity finance through online videos and practical exercises. For charities, the videos and content offer guidance on financial responsibilities and how to prepare accounts. The top tip here includes how to report on charity transactions.