Are you a new charity that has recently registered with the Charity Commission? Or are you just going through the process of registering?
If so, then this blog article will help you get started with the key aspects of charity finances that you need to consider.
We recommend following the 10-point checklist we’ve created for you. It will help charity trustees and managers to understand the key finance tasks for newly registered charities.
1. Understand Roles and Responsibilities for Charity Finances
It’s important to understand the role and responsibilities of trustees and of the treasurer. The treasurer is the person who records and oversees all financial transactions and reports to the Trustee Board.
Read more about the role of trustees in this Charity Commission guidance.
2. Open a Bank Account
You will need a bank account that is suitable for (and in the name of) the church, charity or community organisation.
Read more about ethical bank accounts for charities or find information on the best bank cards for charities.
3. Receive Donations
Most charities rely on donations as one of their income streams. If this is the case for your charity, you will need to think through which donation methods you want to offer and how you will promote these.
Read more about accepting donations here.
4. Register for Gift Aid
Gift Aid will enable you to claim an extra 25p for every £1 given by donors who complete a Gift Aid declaration. It will not cost you or the donor any extra.
Read more about claiming Gift Aid here.
5. Understand Fund Accounting
Fund accounting is the type of accounting used by charities. Charities must follow the principles of fund accounting when creating their financial accounts. Fund accounting is different from business accounting.
Read more about fund accounting here.
6. Determine your Accounting Basis for your Charity Finances
Charities with an income of under £250k can create their accounts on a receipts and payments basis (also known as cash accounting). This is a simplified form of accounting.
Charities with an income of over £250k, or that are charitable companies, create their accounts on an accruals basis.
Read more about choosing your accounting basis here.
7. Keep proper Accounting Records
It’s important to keep accurate financial records. Therefore, it’s important as you register your charity to consider which account package you are going to use.
It’s typically not recommended that you try to manage your charity’s finances in a spreadsheet. You are likely to need multiple funds and multiple bank accounts. Things can get complicated quickly and mistakes can be easily overlooked.
It’s also not recommended that you use a business accounting package (such as Sage, QuickBooks or Xero) as these won’t provide you with the functionality you need for charity accounting. For example, you will need to manage and report by funds, claim Gift Aid and create end of year charity accounts that comply with the Charity Commission.
Read more here about choosing a fund accounting package.
8. View Financial Reports
Trustees and those managing the charity need to view timely, accurate financial reports to fulfil their responsibilities. If you use a cloud-based fund accounting package like ExpensePlus, you will be able to customise reports and provide your team members with access to the reports they need.
Read more about the key financial charity reports here.
9. Set a Budget for your Charity Finances
A budget is a key tool when it comes to financial planning. It will help your charity to:
- Establish priorities and enable you to spend money on the ‘right’ things
- Enable effective decision making and demonstrate good practice
- Provide a benchmark for measuring finances and enable accountability
- Mitigate risk and prevent overspending
- Build trust with donors and enable the charity to achieve its vision
Read more about how to create a budget.
10. Create Year-End Accounts
As well as maintaining good accounting records, charities need to prepare and submit year-end accounts to the Charity Commission.
Depending on the financial income of your charity, you may need to get the accounts you create independently examined or audited.
If you use an accounting package like ExpensePlus that is designed specifically for charity accounting, it will help you create year-end accounts. Additionally, you will be able to download the reports you need directly.
For further information on how to create year-end accounts using ExpensePlus, check out our blogs on accruals based accounts and receipts and payments based accounts.
When your financial year ends, you will have 10 months to create and submit accounts (9 months if you are charitable company). Whilst it is typical for a financial year to be 12 months in length, you may wish to shorten or lengthen your first financial year so that all subsequent financial years start and end when you want them to. This is easy to do within the charity commission online portal.
Top Tip: It’s recommended that your financial year starts on the 1st of a month as this will enable your monthly reports to run per calendar month.
More top tips for managing your Charity Finances
Here are some other key things to consider as you get started:
Your team of trustees
When appointing trustees, ensure that you have the right mix of skills and experience needed, including ideally someone with experience of charity accounting. Perhaps someone who has been the treasurer of another charity previously. It’s also worth trying to avoid having ‘connected persons’ on your trustee board (e.g. paid employees / family of paid employees) as this creates conflicts of interest.
Larger or more complex organisations sometimes have a finance committee including non-trustees who can provide expert advice on other matters such as creating charity accounts, investments, and fundraising.
Ensure that your trustees meet regularly (typically at least 4 times per year), and that reviewing charity finances is part of trustee meetings.
Governing Document
Keep in mind your governing document (Model Deed, Constitution, Articles, etc). It’s important that you refer to this when making decisions, including making financial decisions. You need to ensure that you spend the charity’s money in line with the aims and objectives laid out in the charity’s constitution.
Monthly Finance Reports
Many charities create monthly or quarterly financial reports (also referred to as management accounts), which are usually shared with trustees and other key personnel. It’s important to make sure these accounts are clear, provide the necessary details to keep your team informed, and encourage questions, without being too complicated.
For example, it’s good for your trustees to know how much you have raised in donations recently, but typically, they don’t need to know the split by donation method.
Know your Business Model
Usually, charities are funded by one or a mix of donations, grants, and trading income.
Ensuring you know what your biggest income streams are is really important. How is your income phased throughout the year and what might this mean for cashflow and budgeting? What risks does your business model present?
Further Resources
If you want to find out more about Fund Accounting, check out our other fund accounting blogs, or visit the Stewardship Resources Hub, which has lots of helpful information and resources.
If you are looking for an accounting package that makes managing charity accounts simple and straightforward, then check out ExpensePlus. ExpensePlus is an easy-to-use, cloud-based fund accounting package that is designed for churches and charities. It’s used by hundreds of charities across the UK and is rated 4.8 stars (out of 5) on Google with over 900 user reviews.
