We examine the current state of finance management in the UK charity sector, and how digital solutions can help build a more sustainable financial future
This article is sponsored by Sage Intacct – the nonprofit financial management platform that lets you pursue your mission more efficiently with sophisticated multidimensional database that lets you aggregate transactions and activities across your nonprofit organisation.
Charities operate under a unique set of pressures.
Whilst there are similarities between nonprofits and corporate organisations, the expectations and stakeholder processes that guide decision-making are very different.
Scrutiny from funders (both public and governmental) puts non-profit organisation operations under the microscope.
Even before the onset of the pandemic, these pressures were intensifying. A changing climate in the commercial sector has spilled over into the charity world, with the rise of performance metrics and marketisation, frequent shortages of financial and physical resources, and the increased visibility of social media all contributing to an increasingly complex operational landscape.
All of these pressures have been exacerbated by COVID-19. Whilst the pandemic is still ongoing, and it is impossible to say how the crisis will shape the sector in the long term, we have seen worrying projections regarding the financial health of many charities - with organisations having to make difficult decisions in order to be able to continue to provide the best possible services to their beneficiaries.
The situation is far from over Sadly, as many as one-in-ten charities remain at immediate risk of closure.
The pandemic has transformed many areas of charity operations. However, it does not appear to have had a widespread effect on charity finance management. Finance and impact reporting processes remain largely the same as they were pre-COVID.
This is an unsustainable state of affairs.
Comprehensive studies of impact reporting in the charity sector have found that a concerning number of nonprofits are producing insufficient reporting.
A Charity Finance Directors’ Group study found that whilst more than half of charities reported on output and outcome, broader impact reporting was a far less common practice.
A new report investigating the level of organisational financial literacy in the nonprofit sector has recently been published as part of the Organisational Financial Literacy Project — a collaboration between Charity Digital and Sage Foundation, in consultation with Solid Base Non-Profit Support.
The report examines the current state of organisational financial literacy and impact reporting in the UK charity sector: delving into the root causes and proposing solutions.
The pandemic has functioned as a litmus test for charity finance management.
Whilst fundraising shortages have been widely reported, the UK has actually seen a huge increase in public trust in charities during the pandemic. But with increased demand on both public and private funds, nonprofits must operate responsibly and transparently to maintain this trust.
Charities will be under increased scrutiny. Organisations that can provide clear and accurate impact reporting will be in the best position to secure funding. Other organisations risk being left behind.
This creates a need for accountability, which is defined in this project as ‘the giving and demanding of reasons for conduct’.
This burden of accountability will largely fall upon charity financial professionals. These workers must be accountable to stakeholders (whether trustees, governmental funding bodies or private donors) to justify where and how money is being spent.
Due to issues of capacity, these finance professionals are often undertrained and overworked. In smaller organisations they are likely to be splitting finance tasks with other duties. If the importance of clear and accurate financial reporting is not emphasised, then these tasks are likely to be deprioritised during busy times.
Because of these concerns, many non-profit finance professionals are currently producing the bare minimum when it comes to finance reporting. There is a huge reliance on the use of Excel or paper-based accounting methods, compounded by a large number of charity finance workers only producing monthly reports.
The end result of this is infrequent and insufficient records. This creates a problem for charity stakeholders.
In the non-profit sector, impact is measured in terms of engagement with service users and meeting targets set by trustees. These non-profit organisation stakeholders require information to measure whether operations are succeeding or not.
Unlike in the corporate world, these stakeholders are usually not involved in the day-to-day running of the organisation. Impact reporting and other information relating to financial performance is typically provided by charity finance staff.
This information is important for several reasons. It is vital for governance, as it is impossible to make responsible and sustainable decisions without accurate impact reporting information. It also directly impacts a charity’s chances of securing further funding. In the wake of COVID-19, this is more important than ever.
The current state of affairs could create an accountability gap, with charities that cannot provide detailed, accurate and timely financial reports unable to secure funding.
The primary obstacle to improving charity finance management is capacity. Many smaller nonprofits struggle to dedicate time and resources to financial matters.
There are a number of reasons for this. In organisations with limited resources, finance work is often undertaken by non-finance professionals. These workers may be balancing impact reporting duties with other responsibilities. This means financial processes are often limited to simple bookkeeping, or that financial records may be slapdash or ad hoc.
Even if this worker is able to dedicate a substantial amount of time to the finance function, non-finance professionals will be faced with a substantial knowledge gap. This can have knock-on effects that create further obstacles.
Training could address this knowledge gap. But it will be difficult to access due to the same issues of time and money.
Many nonprofit organisations are either unaware of the tools available or cannot access them for reasons relating to capacity, cost, or resources.
Even amongst organisations with access to these tools, many find accountancy software too complex or difficult to understand.
The report identifies a four-part framework for overcoming or mitigating these obstacles:
Automation is at the heart of these four avenues. Dedicated accountancy software must be made accessible to charities, and staff must be trained to use it effectively.
This process of digitisation can provide a solution to capacity issues, by automating time-consuming processes. It also provides the improved level of detail necessary for charities to report accurately and be accountable to stakeholders.
Any response in terms of software and processes must be supported by an investment in education and training.
Many charity finance workers find accountancy software off-puttingly complex. This perceived level of difficulty can act as a deterrent for adopting finance and accountancy software.
Organisations that do not invest in software and training may save time and effort in the short term. But those organisations will expend far more time and effort in the long term as they rely on methods.
This knowledge gap also means that even competent accountancy software users are often not using the full range of their products’ functionality. These charities are paying for services they are not using.
This is why a programme of education and training must be developed. Charity finance workers need proper guidance to use these systems and unlock their full potential.
Charity finance workers want a way to communicate with knowledgeable peers. This would allow finance workers to share best practices, learn, develop, and build confidence.
These issues will not be resolved overnight. No single solution will be sufficient to correct the course of finance management in the UK charity sector. A co-ordinated response along these four avenues will provide a strong foundation for an integrated programme of learning and support.
Download the Sage and Charity Digital OFL report here