During a grant application process, funders will typically ask for a copy of the latest set of charity accounts to support an application. Funders use these accounts to review the financial performance and position of a charity as part of their decision-making process on whether to make an award.
In light of this, there are some key areas for trustees and senior management teams to consider when preparing their year-end accounts to put themselves in the best possible position for securing grant funding:
Take special care with your reserves policy
The Charities SORP requires a statement of a charity’s reserves policy to be included in its annual report. The purpose of the policy is to demonstrate to external stakeholders why a charity needs reserves and how what it has relates to what it needs.
A good reserves policy:
- Gives confidence to funders by demonstrating the trustees’ active role in financially managing the charity;
- Demonstrates to funders why funding might be needed to undertake a project;
- Assures creditors that financial commitments such as borrowings can be serviced; and
- Manages the risk to reputation should a high level of funds be held at the year-end with minimal explanation.
As such, a reserves policy cannot follow a boilerplate wording and trustees should regularly review it to ensure it gives confidence to stakeholders that they are being open and transparent about requirements for funding. As charities emerge into the post-pandemic period, it is a good time to revisit the target level of free reserves.
Free reserves: don’t double count
Free reserves are the part of a charity’s funds that are freely available to spend on any of the charity’s purposes. They are calculated by taking the total unrestricted funds of a charity and deducting any balances not available for spending, these include:
- Tangible fixed assets.
- Programme-related investments.
- Designated funds.
- Commitments that have not been provided for in the accounts.
This can be a key figure for funders, so be careful to use consistency in your calculations and carefully consider the interaction between fixed assets and designated funds to avoid double counting. Where your approach to this calculation is different to that outlined above, you should clearly explain this in your accompanying narrative.
Use of designated funds: discuss these in advance
Designated funds can be helpful when explaining the charity’s overall funds position, as these funds are ‘ring-fenced’ from unrestricted funds. Designated funds are those that have been identified to be used for essential future spending and the nature and likely timing of that spending should be set out in the accounts.
Examples of designated funds could include:
- Restructuring provisions – smaller entities may need to make cut-backs to their services following funding cuts or lack of available grants. Such a provision, or designation, could be made to highlight to the reader the exposure to redundancy or restructuring costs of this essential spend.
- Fixed assets – a decision may have been made by the board to relocate premises, which will better fit the long-term objectives of the charity. A designation could be made for the purchase price or a deposit.
- Project provisions – a new service may be added to the primary purpose activities offered by the charity. This service may need a significant initial outlay to get it up and running, so the trustees could designate general funds to achieve this.
No new designations can be set-up retrospectively, so it is important that designations are discussed and agreed at board level as well as being formally recorded in meeting minutes before the year-end.
Explain your non-charitable expenditure
As well as the availability of reserves, funders want to see that the money they are giving is being spent supporting a charity’s charitable activities. As such, they may look at ‘charitable spending’, which is the proportion of a charity’s total income that goes on costs that are directly helping it to fulfil its purpose.
This proportion is unlikely to hit 100% as there are other areas that charities will need to spend money on, including:
- Governance costs, such as audit fees;
- Fundraising – in order to raise money, nearly all charities will need to invest money in this area;
- Trading – some charities may raise money by selling goods or services to help them generate funds to spend on their charitable activities.
You should not be embarrassed to say your charity needs to spend money to exist as an efficient and compliant legal organisation, but you should consider narrative explanation of any unusual expenditure.
Allocate your support costs
A charity should consider the allocation of their support costs across all areas of expenditure. Support costs include staff costs for your support functions and associated accommodation costs.
Whilst there are no formal requirements as to how these should be allocated, it should be done on a reasonable basis, which could potentially be the floor area occupied by each team or an allocation based on the amount of time spent by staff in dealing with a particular activity.
We appreciate that this can be a time-consuming job, especially when the surplus for the charity remains the same after the exercise but as noted above, it will impact your proportion of charitable spending.
We advise that this is regularly reviewed and monitored, particularly if there are changes within your charity. Throughout the pandemic, fundraising has significantly altered in most charities, so it may be a good time to review how costs are allocated within the accounts.
The financial information presented in the accounts is only one contributing factor to a funder’s decision on whether to engage with a charity. However, including sufficient information within the accounts on these key areas will build confidence that your charity is investing in the financial management of the organisation.
At Saffery Champness, we regularly advise not-for-profit entities and charities on their reserves policy. If you would like any assistance or further guidance, please speak to your usual Saffery Champness contact, or get in touch with: Casidhe Baleri, Director.