The right financial information for the right trustees
Getting the right financial information to the right people (and one could add: at the right time) is fundamental to the smooth running of a charity. So how is this best done? To answer that question, we can start by ascertaining who “the right people” are. And this will depend very much how your charity is structured. But understanding the organisation and its structure may not be that straightforward with some types of charity.
To step back for a moment, there are various models used in charities. These will include:
- Just a board of trustees, where all trustees have a similar level of interest in the charity’s finances. In this case the trustees will have a shared responsibility for finance.
- Board of trustees, where one trustee is very interested in the figures and the others look to him or her for leadership on the issue. It is essential to understand that the other trustees cannot actually delegate their responsibility to this lead trustee as such, but there is a recognition that this one particular person is more knowledgeable than the others.
- A finance and/or audit committee with terms of reference, reporting through to the whole board. Within this structure there may also be one person who is very knowledgeable and interested in the finances, so the other committee members will look to him or her for leadership.
In the circumstances where there are just one or two interested people to whom the others look for a lead, the detailed financial information could just go to them.
Understanding trustees' ability
In deciding who the right people are and how to present the information to them, you need to understand their ability. For example, are they accountants, or do they have a particular skill with financial information? Are they still active, or are they retired with out of date knowledge? Are they business people or directors with a working financial knowledge? Knowing your “client” or trustee in this instance will serve you well in determining the appropriate level of financial communication.
Having said this, it is valuable to recognise that non-financial people will still require at least an overview of the charity’s finances, in order that they too can make informed decisions.
There are other factors to consider also, such as the size and complexity of the organisation, and the number of key income streams. With income, most charities normally only have one main revenue stream (even if they would like more), so income reporting can be quite straightforward.
A charity’s objectives also need to be taken into account, as there may be three or four key types of charitable expenditure - so summarising these is a constructive exercise.
Reliable information
Financial information has to be reliable, which means it must be up to date, be sourced from relevant and authentic accounts, and has been properly prepared by financially competent people.
In most cases, trustees will need this information so that they can be fully aware of the charity’s financial position, and make informed and sometimes quick decisions. Trustees want to be able to trust the information they are given and not be questioning its reliability. If the information is not reliable, it will have to be improved as a matter of urgency, as misleading data can result in poor decision making, and may even be masking potential internal fraud.
Information to be provided to trustees should go through a review process before being passed to them. Notes should also be added to the information to clarify any salient issues and to explain any key unknowns or uncertainties, and to highlight where any assumptions have been made.
In reviewing the reliability of financial information, you need to understand the abilities of your finance team and how much you can trust what they produce. You need to be clear on what basis the schedules have been produced: have they been prepared using accruals accounting, or are they on a cash basis? You also need to be sure that the charity’s bank accounts and other control accounts reconcile and that there is a system in place to check that they actually do.
Ultimately, in checking the reliability of financial information there is an acid test you can use once a year: would a trustee be able to reconcile the final management information from the last financial year to the audited financial statements?
Relevant information
Trustees need and want pertinent information that gives them a clear overview of how their charity is performing, rather than being swamped with too much data. If they have an overview and they understand it, strategic decisions can be properly made.
In this regard, you need to ask the trustees what they think of the financial information they currently receive. You can also ascertain what additional data they would like to see as well as what pages, schedules and documents they use most, and whether they would prefer the information in a different format.
Some trustees may not fully understand key schedules, so further explanations may be required where necessary. Consider also changing the format of schedules to make key points clearer. Many of the trustees that I deal with are happy to say that they don’t understand a certain document when asked; this is easy to remedy.
Sometimes information is produced because it has always has been done that way, but this does not mean it cannot be challenged or improved. I had one client that always produced a lengthy cash flow statement, because eight or nine years ago they had had major cash flow problems. On reflection, when we reviewed the information being presented to the board, it was revealed that as there had not been any cash flow issues for over five years, so the collection of cash flow spreadsheets were being ignored by the board members!
The quantity of information should be kept under review. One sees a range of report sizes, from just a single page summary, right up to full bound booklets. You need to consider the number of pages being made available, the time available for the recipients to read them, the level of detail on each page, and whether a one-page dashboard summary would also be useful.
You should also consider including key performance indicators (KPIs) in the financial information, if the charity has them. If there are no KPIs, are there other ways for the trustees to gauge how they are performing? Any KPIs that do exist, even if they are not financial, should appear in the information given to trustees.
Relevant schedules
There is no one-size-fits-all prescription for the amount of information to be given to trustees, as every charity is unique. Having said that, you may wish to include in the trustee pack, where relevant, the following: an income and expenditure summary (which could include several supporting pages if there are several income streams and include comparisons to the budget), a balance sheet, a cash flow statement, and a schedule of performance against KPIs.
You may also wish to include some narrative to explain key variances from expectations or from last year’s figures. If a charity has significant restricted funds, these should be separately identified and you should ensure that the trustees can understand how these funds are being used.
Frequency of information
Financial information should be provided on a regular basis, such as monthly or quarterly. If you have quarterly trustee meetings, some “flash” summary figures in the intervening months will often be useful. And on the subject of meetings, you should make sure that information is provided in advance of these events (usually a week beforehand) so that trustees have time to consider the figures before they meet.
Trading subsidiaries
Where the charity has a trading subsidiary, you will need to consider how you report the results of this, particularly where the numbers going through it are significant.
A trading subsidiary will often have a separate board from the trustees, and with its own separate meetings. In this case, you will need to consider all of the above points relating to charities as they will apply to this separate legal entity, with different people in charge.
A close eye
Charities need to keep a close eye on their financial position to help them remain viable. Where there is uncertainty over any factors affecting the charity’s income, aims and obligations, a measure of clarity over cash flows as well as the profitability of any trading subsidiaries will be important.
Where information is not available to trustees through accurate and up to date accounts, decisions will either be made under a greater degree of risk or will have to be delayed. Only once the relevant and reliable information is to hand can the financial implications of any decisions on such matters as major expenditure, investments and recruitment be fully understood.
Being able to anticipate any short term cash flow shortages allows trustees to take early action, whilst projected cash flow surpluses will assist in deciding when to action new investment, expenditure and recruitment plans.
Having real-time financial data to hand, backed up with cogent narrative, gives charity trustees the best chance of securing success for their organisation. Trustees must remain in control of a charity’s financial position, and the best way for them to do this is through regular access to the right information.
