- Strong financial systems and controls help protect you and your charity from threats like fraud and theft. They also help your charity stay on track financially, and run effectively.
- Responsible People should consider an appropriate level of reserves (money that the charity puts aside to cover any unexpected costs) for their organisation’s circumstances, and develop a strategy for building or spending reserves in a way consistent with its purpose.
- There are several money myths which surround charities – particularly small charities. Responsible People play an important role in addressing or dispelling these myths through their actions and policy development.
Establishing robust financial controls is a key part of effective charity oversight. This is especially true for smaller charities that might run on a tighter budget than their larger counterparts, or that might not have the resources to employ people with extensive financial knowledge.
Strong financial systems and controls help protect you and your charity, and increase its effectiveness. Some important steps to take are to:
- have clear written financial procedures, with financial controls, that all staff and volunteers observe
- ensure no one person has sole control over authorising, completing and reviewing your charity’s financial transactions
- plan ahead by developing projections of your expected income and expenditure, examine how your actual budget is tracking against these projections, and take action if required
- ensure your charity’s Responsible People receive financial information at regular intervals, and before each board meeting. Financial information should be presented to them in a way they understand, and they should be encouraged to ask questions about charity finances and accounts
- arrange financial literacy training for your Responsible People so they are familiar with financial terminology, financial concepts and are more aware of some of the problems which poor financial practices may cause, and how they can be remedied
- keep your finances secure as well by restricting access to your bank accounts and your online banking passwords and details
- change passwords if anyone who had access to your charity's banking details leaves the organisation
- not leave any financial information or cash unsecured to prevent opportunities of potential theft.
Our factsheet on setting up strong financial controls contains more information about what charities should and should not do to keep their finances secure.
Having funds in reserve is another aspect of prudent charity financial management, and of good charity governance.
Reserves are unrestricted or unallocated funds that are available to a charity to spend at its discretion, and can serve an important function in a charity’s management of risk. They can help maintain financial stability and allow a charity to meet its commitments, and continue to undertake work and deliver services, even when unexpected events or costs arise.
Reserves can also be used to fund improvements or finance new projects aimed at helping your charity’s beneficiaries.
There is not a standard 'appropriate' level of reserves for a charity to hold. It is important that the Responsible People consider what is an appropriate level of reserves based on their organisation’s circumstances. They should also develop a strategy for building or spending those reserves in a way that is consistent with its purpose.
See our factsheet about charity reserves for more information.
There are many myths which swirl around charity finances. One of the most common is the myth that a charity can’t make money or record a surplus.
Charities can generate a surplus as long as it is then used to further the organisation’s charitable purposes. In fact, generating a surplus should be considered good practice for charities.
Another common myth is that charities can’t spend their money on administration.
Charities are justified in incurring administration costs. Running professional, sustainable and effective charities costs money, which includes spending money on administration. Charities should ensure that these administration costs are reasonable and justifiable.
A charity’s Responsible People have a key role in deciding how much should be spent on administration, and they have an obligation (under Governance Standard 5) to ensure that a charity’s financial affairs are managed in a responsible manner.
See our guidance about operating as a not-for-profit for more information about charity money myths.