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Social investment as part of charity finance

At the moment there is a conversation going on in the charity sector about charity finances and the potential opportunities social investment can deliver. This is within the context of a belief by some that social investment is a "once in a century" opportunity, in the same way that 100 years ago the real first flood of money and contracts came from the government at the time of the First World War.

Whilst it might be a once in a century opportunity for some, it won’t be applicable for everyone. Social investment requires careful consideration.

A canvass of charities last year to gauge their views on social investment found that 20-25% of charities are ready to go for it, 60% are inquisitive but equally concerned about what the change will mean, and 20% will not go on the journey.

Demand for social investment

This followed a report from the Charities Aid Foundation in March 2014 which looked at demand for social investment. Whilst 71% of the organisations CAF surveyed said they thought social investment would be appropriate for their charity, just 57% said they were confident they could generate income to pay back the finance, and only 30% of trustees said they had a favourable view on repayable finance.

So with many charities and trustees still pretty uncertain about how social investment and finance will work for them, what is the case for it?

With the intense competition for fundraising income, the downturn in government grants, the failure of some high profile charities and the continued pressure on overheads, charity finance models are being tested as never before.

Grants and government funding are down by 25%, and according to the latest NCVO's Almanac there is a predicted £4.6bn shortfall in voluntary sector finances by 2018/19. With greater demand for services, charities must also consider the sustainability of their financial strategies, their impact and whether they can operate to the necessary scale.

Given that the financial outlook isn’t likely to change any time soon, could social investment provide the best alternative solution?

A social investment and social finance model using a balance of donations, grants and repayable finance can start to address some of these key challenges, but this is still a fledgling market.

However, a recent survey has highlighted that the next five year period will see a pronounced shift in charity financing models, away from grants and donations and towards borrowing and investment models. The survey quantified this as a 10-12% shift away from donations and grants, and towards social investment models.

Barriers to growth

One barrier to growth has been the fact that some boards are risk averse and not ready to take on repayable finance. However, it is said that a shift is beginning to take place with more trustees beginning to see social finance as an enabler rather than a risk. But there is the need for boards to have greater financial capability so trustees can ask the right questions, put in place the best business models and approach the investment in the right way.

Another key issue is the fact there is still too much complexity and hype in the market that needs to be demystified before charities and businesses are truly able to talk to each other effectively and build the social investment market together.

Jonathon Jenkins, CEO of the Social Investment Business, has picked up this issue. He has said that whilst there is no shortage of people who want to invest for a social purpose, when he gets bankers and charity leaders in the same room, although they are willing buyers and sellers, they simply don’t speak the same language and things can fall through.

He points out that there is "nothing rocket science about social investment", that it shouldn’t be intimidating, but it isn’t the best route for everyone. Nigel Kershaw, chair at Big Issue and Big Issue Invest, has echoed this view and said that not all charities can use a business solution for social change, and they shouldn’t be under pressure to go down the social investment route.

However, it is generally agreed that improved "understanding" is key. The survey endorsed this and highlighted that only 45% of all charities say they have a clear understanding of social investment.

Sara Llewellin, chief executive at Barrow-Cadbury Trust, argues that time should be taken to build understanding so that charities can decide if social investment is a useful tool for them or not. She argued that sometimes taking that time to understand can pay real dividends in the long run as different business models will emerge as a result.

Key questions for charities

Charities need to carefully consider their appetite for risk and what risk means for them. However, there are many other practical questions to ask too including, what finance do we need? Why do we need it? Are there alternative ways of getting finance or raising money? Would a loan or crowdfunding be a better option?

What kind of financing will make the most impact? Which investors should we use? What advice should we seek and are there intermediaries we should be talking to? Will the social investment be part of a balanced funding mix? When will we will be able to repay it? How much will it cost? Will we need to change our business model to do it? What will the impact be and how will it enhance our mission? How will that impact be measured for investors?

For some charities, it is clear that social investment is already enabling them to be financially sustainable, to work to the required scale and make a genuine impact for their beneficiaries. However, it is not a silver bullet that will be right for everyone and, as discussed, there are some barriers yet to be overcome.

But in this era of financial austerity, social investment does provide a real opportunity for charities. What’s needed now are further conversations between charities, government, the investment community and academics that will lead to collaboration and action to grow the market and help greater numbers of charities benefit.

Cass Business School's Mark Salway - charity finance models are being tested as never before.
"A social investment and social finance model using a balance of donations, grants and repayable finance can start to address some of these key challenges, but this is still a fledgling market."

Housing associations utilising reserves for their objectives

We have an increasingly urgent housing problem in Britain, and housing associations currently find themselves between the proverbial rock and a hard place. These large and influential organisations face difficulties in securing the very means needed to fulfil their charitable mission and, paradoxically, also increased expectations for housing development.

How might the sleeping giant of both social enterprise and housing adapt to survive funding challenges and also help plug the housing shortfall? The answers are unsurprisingly complex, but for housing associations classified as charities a small piece of the puzzle may lie in an often overlooked part of the balance sheet – free reserves.

First, some background information. In the UK, housing associations are independent, non-profit making organisations set up to provide low cost housing for people in need of a home. They exist in the gap between the private and public sector in the hope that they can combine the best elements of both.

Majority are registered charities

Today, the majority of housing associations are also registered charities, a status which bestows tax benefits and has cemented the independent nature of the overall sector. In England, this independent status has recently been challenged by the Office for National Statistics (ONS), but the practical implications are so far muted. In Scotland this is not yet a concern.

The economic slump has forced many social sectors and charities into survival mode, but housing associations have so far weathered the storm well, becoming a powerful economic force and influencer on a wide range of social policy.

Tens of billions of public money in the form of grants have made it possible for housing associations to attract even greater levels of private finance, and having no shareholders has allowed the organisations to reinvest, enabling further growth. Any trading surplus made is used to maintain existing housing stock or to help finance new homes.

A tipping point

Today, housing associations are at a tipping point. Britain has a serious and growing housing problem and both the private and public sectors are failing to build enough homes for true regeneration to take place. The shortfall is growing substantially every year. While the private sector is beginning to increase building activity, housing associations have lagged behind. The sheer size and influence of the sector invites scrutiny but, as with most aspects of financial regulation, the causes are complex and counter-intuitive.

Put simply, to build new houses, housing associations need either direct support from the Government or they need to able to borrow the money elsewhere, using their income streams to repay the debt. In England, direct support from the Government has fallen over the years and rents are also being controlled centrally, leaving many housing associations with few means to repair their losses.

This is especially following George Osborne’s announcement that rent paid by social housing tenants in England should be reduced by 1% a year, for four years. In Scotland, the situation is less dire but there is a concerning trend emerging.

The current system of government funding appears not fit for purpose, but an overhaul of the funding model will be years in the making and in the meantime there is a strong need to find alternative income streams. Perhaps a rather under-appreciated element of housing associations – their charitable status and considerable free reserves – can alleviate some of the pressure?

Making reserves work harder

The topic of reserves and policies on the management of reserves has remained low profile for housing associations, even as the number of housing associations registered as charities has steadily increased. It has long been a familiar conundrum for traditional charities which recognise the power of reserves to serve multiple functions.

Whilst every organisation’s financial situation is different, it is important to realise that there are few regulatory restrictions on the management of reserves for charities. The funds are required to be managed in accordance with internal reserve and investment policies but each charity has the ability to evolve these over time. Most charities with reserves of similar size to many housing associations have opted to invest some or all of their free reserves.

In 2014 the Association of Chief Executives of Voluntary Organisations published a very useful report called Good with Money. The report contained a wealth of data and technical advice for charities and revealed that charity reserves are used to generate an investment income of over £3.5bn each year. On average, around 6% of charities annual income comes from their investment portfolios, and in 2014 1,990 large charities with reserves over £5m accounted for nearly £2bn of charity investment income.

Why free reserves at all

For housing associations the best place to start is to identify underlying reasons for holding free reserves in the first place. This may seem obvious, but the business case for reserves often goes far beyond the traditional “rainy day” scenario. Common reasons include:

  • Generating income.
  • Ensuring continuity of income.
  • Specific future projects and liabilities.
  • Emergency spending.
  • Bridging cash flow.

Risk aversion versus risk awareness

In the Institute of Philanthropy’s 2008 report called Investment Matters – In Search of Better Asset Management one of the key recommendations related to risk aversion as an impediment to performance. It went as far as to suggest that the Charity Commission’s guidance should be updated to decrease emphasis on risk aversion, while retaining the emphasis on risk awareness.

Many charities, and certainly housing associations, adopt a very conservative attitude when it comes to reserves, regardless of the underlying purpose of reserves. Rather than being an asset that needs to be managed to maintain its intended function, reserves are deemed to be simply a resource to be protected and preserved.

It can be a surprise to hear that strategies for reserves matter to charity regulators, whose remit includes ensuring the effective use of charities’ resources.

A high level of defensiveness may be appropriate for short term cash flow problems and emergency spend, but for housing associations closer scrutiny of the intended use of reserves may be beneficial. Often there will be a realisation that reserves are required to fulfil both long and short term objectives.

While cash strategies are sufficient and well suited to fulfil shorter term obligations, it is difficult to maintain the real value of reserves with cash-only strategies. This is of particular significance for housing associations which often need their reserves to function as insurance against spending liabilities that run far into the future.

Good reasons for reserves diversification

Strategies for managing reserves should align closely with the underlying reason for holding reserves in the first place. Often the understanding that that multiple strategies may be needed to best manage the overall pot of free reserves is key to this issue.

There are several good reasons to consider investing a portion of reserves:

Creation of useful income stream

The current low interest rate environment has persisted since the financial crisis and it is showing few signs of improvement. As a result, income from cash on deposit is minimal at best and often requires a willingness to lock of capital in term deposits. Housing associations which opt for arrangements involving lock-in periods are essentially trading liquidity for return and the risk/reward characteristics of this trade are not always beneficial.

Housing associations facing dramatically lower grants from the Government and a reduction in income from rents have the ability to create a more attractive income stream from reserves by diversifying away from cash-only options.

Risk diversification

Risk is a fluid concept, often hard to accurately define, and the best we can hope for often boils down to the familiar basket of eggs. Cash is a conservative option, but it is not risk free. Especially not for housing associations whose free reserves often total tens of millions of pounds. As a result of the sums involved, housing associations can find it difficult to effectively diversify counterparty/default risk and large deposits are often placed with a small number of banking institutions.

If a UK regulated bank fails (as happened during the financial crisis) and is unable to repay its deposits, the entire sum is at risk unless the organisation qualifies for the Financial Services Compensation Scheme (FSCS). If an organisation does qualify, the cover in question is currently only £75,000 per institution, far less than most housing association deposits.

Funds invested via investment managers are held in nominee companies. Holding investments in nominee protects the beneficial ownership of the investments, allowing the custodian to administer the investments. Investments held in nominee are ring fenced under separate legal title.

If the investment manager or the nominee company in question gets into financial difficulty there is no direct risk to the client’s investments. Above and beyond this structural difference in default risk, FCSC compensation up to £50,000 applies for qualifying underlying investments.

Choosing to devote a portion of reserves to non-cash investments involves the acceptance of market risk, usually defined as volatility. This is a trade-off that most large charities with significant reserves are willing to make as the income streams created help accomplish charitable objectives. Additionally, the long term horizon of most large charitable organisations make then well suited to absorb the volatility over time.

Investing a portion of free reserves can be a risk diversification exercise. Trustees opt to accept a level of investment risk, tailored to the underlying purpose of reserves, in exchange for lower counterparty/default risk.

Inflation risk

For most charities, reserves are held to assist with both long and short term fluctuations in income and spend. Cash is often the most appropriate option for mitigating short term risks, but £1 will not be worth £1 five years from now. If a portion of reserves is needed to mitigate long term risks then efforts to preserve the real value of reserves may be appropriate.

It may seem counter-intuitive, but often the most effective way of preserving the purchasing power of reserves involves an element of market risk. This principle is particularly important for housing associations which often have maintenance contracts and future expenditure plans that rely on the future purchasing power of current reserves and income streams.

Developing a reserves policy

Charities in general and housing associations in particular have a duty to balance the needs of current and future beneficiaries. One way of ensuring that future as well as current interests are protected is to develop a robust reserves policy, outlining both the intended purposes for reserves and the allowed strategies for managing them.

Within housing associations, there is a traditional view that reserves should not be invested but rather be kept as cash as this is considered the lowest risk option. In reality, housing associations and other large charities are often very well placed to accept a degree of market risk and their charitable objectives are often greatly enhanced by the additional, longer term investment returns.

At a minimum, reserves policies should aim to cover the following:

  • Reasons for holding reserves.
  • The level of range of reserves needed to fulfil the stated reasons.
  • Steps needed to reach the agreed level or range, if reserves are currently falling short.
  • Allowed reserve management strategies for the fulfilment of the above.
  • Arrangements for monitoring and reviewing the policy on a regular basis.

A three-pronged threat

Housing associations currently face a three-pronged threat to their financial position. Dwindling government grants in England, pressure to reduce current rental income and the Governments continued emphasis on the social tenants’ rights to home ownership are stark reminders of the need for non-government income streams. While partial investment of free reserves is only a small part of a complicated puzzle, it may be a viable start.

Tilney Bestnvest's Eline Lofgren - whilst every organisation's financial situation is different, it is important to realise that there are few regulatory restrictions on management reserves for charities.
" ...an overhaul of the funding model will be years in the making and in the meantime there is a strong need to find alternative income streams. "
" While cash strategies are sufficient and well suited to fulfil shorter term obligations, it is difficult to maintain the real value of reserves with cash-only strategies. "
" Choosing to devote a portion of reserves to non-cash investments involves the acceptance of market risk, usually defined as volatility. "
" It may seem counter-intuitive, but often the most effective way of preserving the purchasing power of reserves involves an element of market risk. "
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Changes to the model Gift Aid declarations

HMRC has issued new, amended model Gift Aid declarations. If a charity currently uses the HMRC model Gift Aid declarations then it should start the process now to change over to the new declarations. If a charity currently uses bespoke Gift Aid declarations then it should consider seeking professional advice about the changes that should be considered.

It is each charity’s responsibility to ensure that all of its Gift Aid declarations are compliant, even if it uses third parties to provide fundraising services. All declarations need to be reviewed, whether contained in printed materials, online materials or fundraising scripts and including those used by any organisations to which a charity has outsourced fundraising functions. This will range from direct mail companies to online donation portals.

What if you do nothing

All Gift Aid declarations based on the previous 2012 HMRC models will be valid until 5 April 2016. If after 5 April 2016 a charity does not use the new model Gift Aid declarations in respect of new donations then HMRC may challenge that charity’s Gift Aid claims. This could cause cashflow disruption to the charity even if its declarations are eventually found to be compliant with the relevant law.

Gift Aid declarations made before 5 April 2016 which relate to future donations will continue to be valid (if they were valid when they were made). A charity does not have to renew any enduring Gift Aid declarations that it holds as a result of the new models. It must, of course, ensure that it continues to store these declarations indefinitely if it wishes to be able to rely on them in the future.

Mandatory information

The new HMRC models are not mandatory. The HMRC models have always been optional and many charities use their own declarations instead. If they do, their declarations must contain the following minimum information:

  1. Name of charity.
  2. Donor’s initial(s) and surname.
  3. First line/house number and post code of donor’s home address.
  4. A statement that the donor wishes the charity to claim Gift Aid on the donation.
  5. A statement that the donor needs to pay the same amount or more of income tax and/or capital gains tax as charities and Community Amateur Sports Clubs (CASCs) will claim on the donor’s gifts in the tax year.
  6. A statement that the donor is liable for any shortfall if the above statement is incorrect.
  7. The date of the declaration.
  8. If applicable, a statement that the declaration covers past or future donations.
  9. If the declaration is embedded in a sponsorship form it must also include the amount of donations collected, the date on which pledged donations were collected and the date when sums collected were paid to the charity.

Advantages with the HMRC models

The HMRC model is compliant with the law and charities should not normally deviate from it without professional advice. HMRC says that if you use its template “you can be sure that declarations will meet HMRC’s requirements”.

If a charity uses declarations that are not compliant with the law then HMRC may decide that its Gift Aid claims are invalid and require it to repay any historic claims it made based on those non-compliant declarations.

If a charity uses declarations that do not follow HMRC’s new requirements then it may still be compliant with the law. The risk is that HMRC could dispute this or allege that donors didn’t understand the declaration. This could be prompted, for example, if it was discovered that a donor completed the Gift Aid declaration when they were not eligible. If it was a one-off occurrence or clearly the fault of the donor then HMRC will claim the wrongly paid tax back from that person.

However, if there are multiple incidences of this at a charity or if HMRC thought that the language was not clear enough then it might suspend or refuse that charity’s Gift Aid claims and seek repayment of past claims.

Background to the changes

Prior to 2012 Gift Aid declarations required donors to confirm that they were a UK tax payer. HMRC was concerned that donors were making Gift Aid declarations when they had not paid sufficient income tax and capital gains tax to cover all of the donations made under their annual declarations. It produced new longer model Gift Aid declarations and issued guidance to prompt charities to change their declarations.

These changes were introduced in a hurried manner leading to confusion, especially as HMRC initially failed to provide for a transition period as charities moved to the new declarations (guidance and a transitional period were subsequently introduced).

The model declarations introduced in 2012 confusingly included statements that taxes such as VAT and Council Tax did not count towards the donor’s tax payments for the purposes of assessing their eligibility to make the declaration. By listing two taxes which did count and two which did not, it was not as clear as it should have been for donors about how to treat other taxes which were not listed.

Donors who paid taxes such as inheritance tax, National Insurance contributions or Vehicle Exercise Duty were sometimes unclear as to whether or not those payments counted towards their tax paid in the relevant tax year for Gift Aid purposes.

The 2012 model declarations also referred to donations that a donor had made to all charities and Community Amateur Sports Clubs in the relevant year. Many donors who completed these declarations did not know what a CASC was, or why it featured on their declaration. This requirement contributed to an unwieldy declaration that was difficult to understand and too long and dense to be considered worth reading by some donors.

The changes

The new declarations are simpler, clearer and shorter. The effectiveness of the declarations depends on them being read and understood by donors, and so these changes are welcome.

More controversially, perhaps, the new declarations include the following statement emphasising the personal liability of the donor for making declarations when they are not eligible:

“I am a UK taxpayer and understand that if I pay less income tax and/or capital gains tax in the current tax year than the amount of Gift Aid claimed on all my donations it is my responsibility to pay any difference.”

This is aimed to address HMRC concerns that donors were deliberately or recklessly making improper declarations. This inclusion has led to some concern that the new declaration will be off-putting for risk averse donors. However, the statement does reflect the underlying law and so, no matter how supportive the Government may be of enabling fuller take up of Gift Aid, it is hard to conceive that HMRC will be persuaded to remove the new “responsibility” element of the declaration in the immediate future.

The model declarations contain the optional phrase: “Boost your donations by 25p of Gift Aid for every £1 you donate." It is commonly used by charities already and HMRC research suggests it will increase the likelihood of donors opting in to Gift Aid. It is not a mandatory part of the HMRC model and can be omitted if desired without endangering the validity of a charity’s declarations.

The new models

The three old models have now been replaced by five model declarations covering:

  1. One-off donations to a charity.
  2. Multiple donations to a charity.
  3. One-off donations to a CASC.
  4. Multiple donations to a CASC.
  5. Donations on a sponsorship form to either a charity or a CASC.

The model Gift Aid declaration for past, present and future donations has been replaced by a new declaration for “multiple donations”. The donor no longer needs to tick the relevant box(es) to indicate that their declaration covers past, present or future donations. Instead, the multiple donation form has the same single opt-in box as the single donation form with wording to make clear that it applies to past and future donations too. This minimises the risk of accidentally ticking or failing to tick the correct boxes. The four year limit on Gift Aid claims for past donations remains unchanged.

The need for storage

The underlying law has not changed, and so charities need to continue to require donors to positively opt in to all Gift Aid declarations, and charities must continue to retain copies of those declarations, or the written confirmation letters of verbal declarations. These must be kept in case of an HMRC audit and to comply with any statutory, constitutional or accounting requirements governing document retention.

Welcome clarity

The new models bring welcome clarity to the model Gift Ad declarations which many had found cumbersome and confusing since the 2012 changes. Every charity which has not already done so should review their declarations to ensure they are compliant, especially before HMRC’s 5 April 2016 deadline. Even those charities which have bespoke declarations should consider whether they could benefit from copying some or all of the changes to the wording of the HMRC declaration.

Bircham Dyson Bell's Donald Taylor - the effectiveness of the Gift Aid declarations depends on them being read and understood by donors, and so the HMRC changes are welcome.
"A charity does not have to renew any enduring Gift Aid declarations that it holds as a result of the new models."
"The underlying law has not changed, and so charities need to continue to require donors to positively opt in to all Gift Aid declarations..."

Serious financial difficulties and the liability of trustees

By its winding up order, made on 20 August 2015, the High Court laid upon the mortuary table the corpse of Keeping Kids Company. The masked and gowned figures of the Official Receiver, Charity Commissioners and, who knows, other pathologists will now have assembled to dissect the body and determine the cause of death. At first sight, the cause of death is obvious. Kids Company died of starvation - it ran out money.

According to its published accounts for the year to 31 December 2013, Kids Company had no endowment and depended for its income entirely on government grants and substantial donations from companies and private individuals. It seems that all of these different sources dried up and one question has to be "why"?

Was the apparent loss of confidence just the result of a malicious whispering campaign conducted by competitors envious of its success and politicians riled by its campaigns on behalf of disadvantaged children or were the allegations of financial mismanagement true?

Regulators do not move with CSI like speed and it will be some time before we know the answer. Spare a thought then for the trustees of Kids Company – well intentioned people whose reputations, peace of mind and, possibly, financial position will depend on it.

This last point may surprise. Like many well advised charities which operate in high risk areas and incur significant liabilities to staff, suppliers and others, Kids Company was a company limited by guarantee. Why, then, should its trustees or the trustees of any other incorporated charity be at risk of personal liability, if the charity fails to pay its creditors? What can charity trustees do to reduce the risk of being found liable?

Directors' duties

The answer lies mainly in the Insolvency Act and the law relating to directors’ duties (because trustees of an incorporated charity will almost inevitably be directors for the purposes of company law) which, between them, provide a liquidator with quite a wide choice of means for recovering money from directors whose company (whether charitable or not) has become insolvent.

There is space only to mention the main means, but a liquidator is duty bound to consider whether or not it is in the creditors’ interest to make use of them and, in any event, to report to the Department for Business Innovation & Skills on the conduct of the directors of the insolvent company. Of course, nothing in this article should be regarded as a direct or implied reference of any kind to the integrity, character, competence or otherwise of any trustee or staff member of Kids Company.

Liability for fraudulent trading arises if any business of a company which is being wound up has been carried on with intent to defraud creditors, or for any other fraudulent purpose. Anyone (not just a director) who was knowingly party – and you do have to be knowingly party - to the fraudulent business can be liable and there has to be "actual dishonesty, involving...real moral blame".

A director can be liable for wrongful trading if: their company goes into insolvent liquidation at a time when its assets are not sufficient to pay its liabilities and the expenses of the winding up; and, at some time before that, the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding this.

They will not be liable if they took every step with a view to minimising the potential loss to the company's creditors as they ought to have taken. This usually, but not always, means following one of the insolvency procedures available. Liability only arises if continuing to trade makes the company worse off.

The standard against which the director is measured is the same as the standard, referred to below, which is applied in assessing whether or not a director is in breach of the duty to exercise reasonable care, skill and diligence. Dishonesty does not have to be shown.

Compensatory contributions

Someone liable for fraudulent or wrongful trading can be ordered to make such contribution to the pool of assets available for the company’s creditors as the court thinks proper (the aim is to compensate the company, not punish), and can be disqualified from acting as a director of any other company (without the leave of the court) for between two and fifteen years. Fraudulent trading is a criminal offence, but wrongful trading is not.

As far as directors’ duties are concerned, these were codified by the Companies Act 2006, which specifies seven, but I want to focus on just one of them - the duty to exercise care, skill and diligence.

This is a requirement that a director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person who has, first, the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and, second, the general knowledge, skill and experience which that individual director actually has.

So, a director should take the care which someone with a reasonable level of knowledge, skill and experience would take (ignorance is no defence!) or, if they have specialist knowledge, a higher level (the professionally qualified should take note!). In applying the test, regard is to be had for the functions of the particular director, including their specific responsibilities and the circumstances of the company.

How does this apply to a trustee of a charitable company, who may be time poor and assuming that it is enough to roll up to board meetings, having flipped through as much of the paperwork as they can, and, for the rest, to rely on the senior management team to implement controls, enforce them and comply with them themselves? The short answer is that, in this day and age, this would be unwise.

A longer answer is that a trustee will be in a much better position to ward off a liquidator if they can show that their charity complied with generally accepted principles of good governance and especially those about managing risk, having internal financial controls and monitoring compliance with them.

The Charity Commission guidance and even the UK Corporate Governance Code are good sources of ideas. When it comes to monitoring compliance, an internal audit function is really useful and any charity of any size should consider having one.

React quickly

Trustees can reduce their risk in the area of wrongful trading by making sure that they always have up to date financial information (for most, monthly management accounts must be appropriate) and react quickly to anything in them, or any other signs, which suggest that financial problems are looming.

Once things start to slide, the pace of the descent can become alarmingly rapid and time to think, plan and take advice is in short supply. If things are going wrong, take independent financial advice and make sure full board meetings are held as often as necessary, with decisions fully minuted.

If, as is not uncommon, there are one or two people who tend to dominate decision making and who may well have managed the charity into its uncomfortable position, this will be a time to act independently, but resigning as a director will not guarantee that you will not be liable. If you cannot persuade the rest of the board that action is needed, it may be enough to resign. Ideally, before you do, take independent advice and write to the other directors about your concerns.

A possible, but not foolproof, way of avoiding insolvency in the first place is to ensure that the charity has adequate reserves. It is well understood that people to not give money to charities for it to be held dormant in bank accounts “just in case”. But, at the same time, it is perfectly reasonable to hold funds to deal with contingencies, foreseen or unforeseen, and it is very common for charities to do this.

If things turn sour, having reserves buys a bit of time for a charity to find a better solution than winding-up or, at least, enables a more orderly winding up process to be followed.

Finally, every trustee should ensure that they are protected by a sensible level of liability insurance.

Thomson Snell & Passmore's James Partridge - when it comes to monitoring compliance, an internal audit function is really useful and any charity of any size should consider having one.
"Liability for fraudulent trading arises if any business of a company which is being wound up has been carried on with intent to defraud creditors, or for any other fraudulent purpose."

Avoiding what can lead to financial failure

The fallout from the failure of Kids Company manifests itself in the human stories of families and young people left without support they had come to rely on. Whatever your take on what happened to this particular organisation, its demise is a powerful reminder of the responsibilities of trustees, which surely include making sure that the charity has the firm foundations upon which it can fulfil its objectives.

After all, we’ve seen this before with the demise of MyGeneration in 2012, after it lost the support of its donors. As the saying goes, those who ignore history are condemned to repeat it…

The Charity Commission's updated (10 July 2015) guidance on what is expected of charity trustees, The Essential Trustee: What you need to know, what you need to do (CC3), was prompted by a desire in the sector for clarification on the legal obligations imposed on trustees and a better explanation of what the Charity Commission expects of them.

The Charity Commission, set up to oversee charities, used to be well funded and could offer assistance to charities but now that its budget has been drastically cut is far less able to do so. Charities therefore have fewer places to turn to for advice and whilst there is a plethora of information online, it is not always easy for managers and trustees to wade through.

Serious consequences

All charities are regulated and governed by law - get that wrong and the consequences can be extremely serious. For example, charities employing staff need to be aware of employment law, charities providing registered care need to be aware of the requirements of the Care Quality Commission; both must adhere to health and safety legislation.

All charities are, of course, required to comply with financial regulation; without a sound financial platform they will not survive and will not achieve their objectives. Good financial management that provides trustees and management with a "real time" view of the current status is a prerequisite for success.

It would be too easy to simply say that some trustees are recruited for their name and connections, rather than their financial management skills, but ignorance is no defence and they cannot escape their responsibilities to act with prudence. That said, I’ve yet to come across an ill-intentioned trustee and we’d end up with a very vanilla sector if it was run by accountants.

So it’s not for trusteeship to be restricted to accomplished accountants, lawyers, risk managers etc. but for such professionals to equip trustees to spot the issues ahead and manage them.

As we have seen all too often, the human costs of shutting stable doors after horses have bolted are just too high to make second rate financial management acceptable.

Subject to a charity's governing document and any relevant legislation, trustees have a power to delegate a decision they might not feel equipped to make. However, they should always make it clear in any dealings with a third party acting for and on behalf of the trustees that they are acting as an agent for the charity only. They can delegate the work, but not the responsibility.

Ultimately, provided trustees comply with charity law and the requirements of the Charity Commission, ensure the charity does not breach any of the requirements or rules set out in its governing document, and act with integrity and avoid conflicts of interest there should be no cause for the Charity Commission to investigate their actions. However, be under no illusion: it is still possible that trustees may be found personally liable for any debts or losses that a charity may face. Prudence at all times is essential.

Challenging the status quo

Trustees' inductions need to be conducted properly and in person so they are well aware not just of their responsibilities but also how to challenge the status quo. We will all be familiar with the scenario of the dominant CEO or trustee who can make other trustees feel unable to speak up if they feel that something is wrong. In an ideal world they are recruited for their complementary skill sets as much as their motivation and contacts, but few of us operate in an ideal world.

Trustees should be able to demonstrate at all times that the charity is legally compliant and is efficiently run so as to further the charity's purposes.

All charities are required to have a risk register and it is the responsibility of the trustees to keep it up to date. Doing so should alert them to issues on the horizon. Nevertheless, a few pointers will help.

Different charity status

There are, of course, different types of charity status: for taxation purposes only, as a rust, a Community Interest Company, a Charitable Incorporated Organisation and a corporate entity registered as a charitable company, usually limited by guarantee, and required to report under both the Companies Act and Charites: Statement of Recommended Practice (SORP).

For all charities, there are big changes to accounting reporting standards in place for financial accounting periods commencing on or after 1 January 2015, and a well managed charity will have already prepared for this. Unfortunately there are also changes for financial accounting periods commencing on or after 1 January 2016 because the SORP has been updated to reflect this year’s update to FRS 102, the new UK GAAP (Generally Accepted Accounting Practice).

The overarching intention of the reporting changes is to make life simpler, but there will be nothing simple about having to back-track to the beginning of the financial year because you weren’t ready. Far better to embrace the changes now.

Serious incidents

If the trustees know or suspect that the charity may be involved in a serious incident, a report should be made to the Charity Commission as soon as possible. Serious incidents include fraud, theft or the charity losing any of its assets or money; a large donation from an unknown source; links with terrorism; the charity having no policy to safeguard any vulnerable beneficiaries; or suspicions, allegations and incidents of abuse or mistreatment of vulnerable beneficiaries.

Here are some common pitfalls charities have been caught out by over the years:

Not operating a trustee appointment and induction process that works for the charity is a bad pitfall. Many times a charity will appoint a trustee as they are a well known name. However the trustee must either be appointed for their skill set or given the skills they need by induction. On occasion, a charity’s secretary may, quite rightly, send over all the relevant induction documentation for a trustee to read over - but that needs to be supplemented by sitting down and explaining it all in person.

Not actively managing a formal risk register is another risk factor in itself. This might be something that the charity CEO or secretary can put together, but it is the trustees’ responsibility to keep track of it.

Tax status confusion

Misunderstanding the tax status of the charity’s income streams can create chaos and confusion. In the main, activities of a charity are exempt from VAT; charities therefore cannot register for VAT and consequently can’t claim it back. However this can change, for example when a charity sets up a subsidiary business to sell, say, books and clothes.

Care needs to be taken to be clear as to what is business and non business income from a VAT perspective. Trading activities in the course of carrying out a charity's primary purpose.

For example the provision of residential accommodation by a care home charity in return for a payment, or the holding of an exhibition by a charitable art gallery or museum in return for admission charges is called "primary purpose trading" and must be distinguished from other trading income to which an annual limit of £50,000 within a charity applies.

There are also different tax implications for different types of contracts that a charity may undertake, which could be exempt or standard rated or zero rated. It is important to get it right to maximise income from new revenue opportunities. Sorting it out after the VAT man has called is an expensive option.

Cash flow management is a challenge for any business, but a charity has the added complication of matching peaks and troughs in funding with paying for contracted activity. It must be careful to ensure that forecasts are planned carefully. The timing of the funding ideally needs to match with the increased resources and activity needed to complete the contract.

Knill James' Sue Foster - trustees' inductions need to be conducted properly and in person so they are well aware not just of their responsibilities but also how to challenge the status quo.
"Trustees should be able to demonstrate at all times that the charity is legally compliant and is efficiently run so as to further the charity's purposes."

Questions for trustees before signing the financials


JUDITH MILLER of accountancy firm SAYER VINCENT says there are questions that charity boards need to ask before approving their Annual Report and Accounts.The Annual Report and Accounts process is both a compliance and communication exercise. At approval stage you should be asking:

How do the statutory accounts compare with the management accounts we have been reviewing all year? Is this what we expected? If there are differences ask for an explanation.

Is the result for the year – deficit or surplus – what you expected? Has your income and expenditure changed significantly year on year and do you understand why this has happened? A deficit isn’t always a bad assuming you planned for it

How do your reserves stack up against your policy?

Do you state your free reserves? Why have you set this level? Do you explain why you have the designated funds and when you might use them? Is your policy clearly stated in the annual report?

If you have any form of defined benefit pension scheme - the information contained in the accounts is unfortunately far from plain English – the key issue for trustees when reviewing the accounts is what are the actual annual cash payments and is this affordable?

Can you pay debts as they fall due? Do you have adequate net current assets? Don’t forget when you sign off your accounts you are confirming that you will remain in operation for 12 months from the date of signing. In other words you consider you are a “going concern” for that period. Do you need more information about your income pipeline and cashflow for the coming year to conclude?

Charities get funding in different ways – if you spend on fundraising, do you comment on performance, your investment in fundraising and your return? Consider both the current year and how any investment is designed to pay off in future too?

Who are your stakeholders, what questions might they ask when reading your accounts? What are the salient features of this year’s results and your year-end position? Have these been addressed these in your finance review (this narrative that will form part of the Trustees’ Annual Report)?

Have you explained some of your key risks in your Trustees’ Annual Report? Is your risk management statement clear about how you manage risks in the charity?

Have you set out our remuneration policy in the Trustees’ Annual Report? This is new in SORP 2015. You should also have additional disclosures on the pay of key management personnel.

You will now be following SORP 2015 rather than SORP 2005 – this is more evolution rather than revolution – ask your finance team or auditors to explain what have been the key changes.

Whilst I’ve focused on the finances, what’s vital is to reflect on your main purpose, on your strategic objectives and consider how well the Annual Report and Accounts are communicating how you are delivering on this. Will your document help readers understand what you do and how you have performed? Does your report answer the question: “So what difference have you made?”

That’s a recap on reviewing your statutory accounts and annual report. So be happy you can approve, ensure the Annual Report and Accounts are compliant and are the best they can be. Going forward see them as a communication tool, treating the annual process as an evolutionary one with improvements each year.

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Pauline Broomhead
Sayer Vincent’s Judith Miller – what’s vital is to reflect on your main purpose, on your strategic objectives and consider how well the Annual Report and Accounts are communicating how you are delivering on this.

Changing charity financial leadership strategies

A recent report from the Charities Aid Foundation and the Association of Chief Executives of Voluntary Organisations, Social Landscape: The state of charities and social enterprises in 2015, found that the most pressing challenge for charities is generating income and achieving financial sustainability.

This is then a time for outstanding financial leadership and charities should be able to look to their treasurers and finance teams to contribute to the success of the organisation. Below we will consider the financial leader’s contribution to financial sustainability

Beyond budgeting

Decisions on how to allocate resources are some of the most difficult decisions facing any organisation. For charities, this can mean rationing resources for some beneficiaries while they spend money on building a new IT system – not a palatable choice, but possibly necessary to improve services in the future. So how does a charity make such decisions?

Typically, the annual budget round is how charities make their resource allocation decisions. Managers put together activity plans based on the strategy and cost them.

The role of the finance team may be no more than “adding up” – putting all the budgets together to see what the whole organisational budget would look like. If the total budgeted expenditure is more than anticipated income, then managers are asked to "think again" or arbitrary cuts are imposed.

There are obviously quite a few problems with this approach. Elements of traditional budgeting are fine and necessary – such as costing an activity or a plan. But aspects of the overall organisational budget contain fundamental flaws which financial leaders can address. Thought leaders Hope and Fraser addressed these in their book, Beyond Budgeting: How to Break Free of the Annual Performance Trap, and charity financial leaders can learn much from their case studies and examples.

Whose money is it anyway?

The annual budgeting process encourages a “spend it or lose it” mindset among managers and staff. They consider an allocated budget to be “their” money and will spend it even if the indicators are showing that the activity is not necessarily the best way to achieve the desired outcomes or that strategic priorities need to change in the context of the external environment.

We can see this at the end of every financial year – expenditure is always higher in the last quarter as managers try to use up unspent budgets. While this behaviour is understandable – you may have a cut in the budget the following year if you seem to not need it all - it is encouraging waste.

Why on an annual basis?

Financially, we need to change our approach to allocating resources once a year. This is too inflexible and commits us too far in advance. When your outside environment is evolving and constantly throwing up new challenges, what is the value of a budgeting system that sets rigid targets for the next year to eighteen months? A better approach to allocating resources is to regularly review the resources needed, consider the risks and external environment, and release the resources as they are needed.

In order to undertake regular resource allocation decisions, charities need the right information. This will include forward looking financial information based on up to date actuals and best estimates of future incoming and outgoing resources. Charitiess also need to consider the risks attached to those forecasts. While some elements of the forecast may be fairly certain, other aspects may carry a higher degree of risk. Factor the risks into the appraisal of the resources likely to be available.

Performance measurement

Traditional management accounts tend to produce historic accounting information, comparing this to the budget prepared many months ago. The budget is used as a way of expressing expectations and then success is measured by whether the actual results are close to expectation. There are a number of problems with this approach:

  • This focuses on “inputs”. Spending the expected amount of money is not actually a measure of success. We are surely more interested in the outputs and outcomes of our activity if we wish to measure success.
  • The expectation may have been based on a false premise – in other words the budget was wrong.
  • The approach usually assumes that what was done before was acceptable or successful, as budgets tend to build on the previous year´s budget and accounts. It is often taken for granted that core elements of a service will be retained and budget decisions focus on incremental changes. For example, the staffing element of a department’s budget will be a “given”, and discussion revolves around the relatively small amount of the budget that is spent buying in goods or services.
  • Ideally, and indeed increasingly so, charities (well, larger charities) have well developed and embedded staff appraisal systems which set and review non-financial performance targets for individuals. They may also have strategic planning systems, with clearly defined objectives, targets and indicators. These systems will be undermined if there is a continuance of a culture that emphasises hitting the budget as the real way in which performance is judged.
  • Charities may therefore be giving staff and managers contradictory messages about performance expectations.

Performance targets can help a charity to focus its efforts and achieve desired outcomes. In order for target setting to work, the targets do need to be accepted by the staff teams working towards them. Absolute targets (such as raise £500,000 from legacies this year) can be perceived as too difficult to attain, particularly if imposed on a team, with the result that they are demotivating in their effect. On the other hand, absolute targets can be too easy, such that the manager will “cruise” – just meeting the target but doing no more.

Adaptive performance management methods use relative targets so that you maximise the results given the environment in which you are working. A relative target might ask a team to improve on the results they achieved in a previous period. It might also benchmark against other organisations in a similar field and take into account the general climate in which your charity is working.

Cost control objective

Budgets are also seen as a method of controlling costs, but this is unlikely to be achieved, given "spend it or lose it" mindsets and the sense that a good performance is to come in close to budget. In fact, an expenditure budget is often seen as a floor rather than a ceiling to the level of expenditure. Managers will try to ensure that they spend their whole budget.

This tendency is exacerbated in charities because of restricted funding and project budgets. The legal requirement to return unspent restricted funds incentivises charities to spend all the allocated funds whether they are needed or not.

The annual budgeting round also sets an expectation in managers’ minds that they are likely to be asked to reduce their proposed expenditure at some point. Quite rationally, they therefore inflate initial expenditure proposals – they "bid to be safe". So the initial budget the finance team creates from these initial proposals is grossly inflated. So apparent "cost savings" are nothing of the sort – they merely reduce the planned expenditure to a more likely scenario.

The current behaviour of managers is completely rational and to change the behaviour, you have to change the rules.

What should the rules be?

Organisations would have implemented changes in this area understand that they have to make a cultural shift. You need to stop rewarding "spend it or lose it" behaviour and instead make heroes of colleagues who voluntarily offer expenditure budgets to others because they realise they do not need it. Swedish companies are particular experts in this area and reward managers who are thrifty. Performance is measured by outputs, outcomes and results – particularly in terms of the benefits and gains to service users or beneficiaries.

Role of the financial leader

A financial leader will recognise the cultural issues arising from traditional ways of budgeting and reporting financial performance and work with colleagues to express plans and outcomes in ways that incentivise all staff to act in the interests of the charity and its beneficiaries.

Sayer Vincent's Kate Sayer - a better approach to allocating charity resources is to regularly review the resources needed, consider the risks and external environment, and release the resources as they are needed.
"In order for target setting to work, the targets do need to be accepted by the staff and teams working towards them."
"The current behaviour of managers is completely rational and to change the behaviour, you have to change the rules."

Protecting a charity against serious financial loss

Any frisson of schadenfreude, i.e. taking any pleasure from its misfortunes, which any charity trustee or senior manager may feel on reading the headlines about Greenpeace International’s 3.8 million euro foreign exchange losses should, on mature consideration, be replaced by a more sympathetic reaction and prompt them to consider how robust their own charity’s policies and procedures are.

The headlines could have been taken as suggesting that Greenpeace International had been speculating unwisely in volatile investments, but Greenpeace’s own statement and subsequent comments make it clear that this was not the case. It appears that Greenpeace receives donations mostly in euros, but has expenditure in many other currencies into which it therefore has to convert euros.

Greenpeace’s own statement says that a single staff member, acting in what they thought was the best interest of the organisation, entered into contracts to buy currency at fixed exchange rates. Presumably, they hoped to protect Greenpeace against a fall in the value of the euro. Greenpeace’s statement acknowledges that, even though the member of staff exceeded their authority, a single staff member should not have been in a position to do this.

Hundreds of financial transactions

Even modestly sized charities will carry out hundreds of financial transactions each year and are likely to enter into at least a few potentially onerous contracts or ones which will cost a lot of money relative to the charity’s size. Charity trustees are usually busy people who cannot devote all, or even a lot, of their time to their charitable duties. At the same time, charity trustees are under a duty to protect the charity’s property and could be personally liable if they negligently allow any of it to be lost.

Where a trustee has taken reasonable precautions, they are not liable if trust property is lost or stolen without default on their part.

Under various provisions, both the courts and the Charity Commission have power to relieve charity trustees wholly or partly from liability for a breach of duty and there are statements from both that, in the absence of dishonesty or a corrupt purpose, they will not seek to make trustees personally liable because, as was said in one case, “to act on any other principle would be to deter all prudent persons from becoming trustees of charities”.

However, it should be remembered that charity trustees are under a duty to report to the Charity Commission serious incidents which happen to their charity, as soon as possible after they have happened. They also have to confirm in the charity’s annual return that none have occurred and not been reported.

A very recent alert about this from the Charity Commission says that: it regards a “significant loss” as a serious incident; failure to report could be evidence of mismanagement leading to regulatory action; and an inaccurate statement in the annual return could be a criminal offence.

Whilst bearing their undoubted legal risk in mind, experience has shown that most charity trustees are more mindful of the potentially serious adverse effect which losses will have on their charity’s financial position and its ability to attract donations in the future – it now being well known from market research by Ipsos MORI that donors expect their chosen charity to have good financial management, amongst other things.

Identifying serious incidents for reporting

What, therefore, should busy charity trustees do to reduce the likelihood of serious mistakes happening and so discharge their legal duty, protect their charity’s future and identify any serious incidents which should be reported? Exactly what is appropriate must depend on the size of the charity and the type and scope of its operations, but the following should be considered and, it is suggested, implemented in a way which is appropriate.

The trustees should adopt formal written instructions which make clear the extent to which they have delegated authority to make important decisions, and to whom, which should be published to all relevant staff. Key areas relevant to this are authority to enter into contracts of different sizes or of certain types (the trustees may of course reserve decisions about key contracts to themselves) and authority to pay invoices.

(It is worth making the point that if a binding contract has been made with a third party, it will be too late to refuse payment of invoices arising under the contract, but at least the need for the payment to be authorised will reveal the existence of the contract and may enable the situation to be retrieved or mitigated.)

Exceeding delegated authority

It is key for the instructions to make it clear that if a member of staff wants to exceed their delegated authority, they must refer to their line manager and that failure to do so will be a disciplinary matter.

A charity of any size should have a finance or audit committee whose members, it is suggested, should not include executive staff but should include one person at least with good financial knowledge and experience.

As with any other committee, it should have written terms of reference and these should include, as responsibilities, regularly to review internal financial authorities and control systems; have an effective internal audit function (as to which see below); and monitor staff attitudes to controls. Many charities do have a committee like this, but their terms of reference are sometimes not clear and they are not all seized of the need to challenge the information which they are given.

Internal audit can be a great help with the last point. Trustees may understandably be reluctant to incur the expense of having an internal audit function. It may be possible to obtain it through volunteers and many accountancy firms provide the service. This may be cheaper and provide access to wider knowledge and experience than using paid staff or volunteers.

Internal audit can now cover more than just the system of financial controls, but checking on these and, importantly, whether they are being followed is, it is suggested, additional comfort which busy trustees are justified in seeking, given the recent experience of others.

Thomson, Snell & Passmore's James Partridge - the trustees should adopt formal written instructions which make clear the extent to which they have delegated authority to make important decisions, and to whom.

Making foreign exchange work for charities

Charities may not seem the most typical participants in the foreign exchange market, but they require the same currency strategies as international businesses. How to procure emerging market currencies and volatile exchange rates are issues affecting charities and getting it wrong comes at a high price.

There are currently over 164,000 charities in the UK and this number is only set to grow over the next five years. The recession has proved a mixed blessing, with the drop in charitable giving causing charities to look for more cost effective and innovative ways of managing both risk and currency.

Estimates show charities trade at least $6 billion a year on the foreign exchange market, with humanitarian aid charity World Vision International trading over $1 billion a year in 73 countries alone. However, whether it’s a small or large charity looking to fund international operations, it is essential that it implements an effective FX strategy in order to have the greatest impact.

Maximising exchange rates

For small charities in particular, foreign exchange is a vital part of international operations. Lawrence Titterton, chairman of Alongside Africa, comments: “It is important for all charities operating in developing countries to maximise the foreign exchange rates that they can achieve, and this is particularly relevant for small charities. Whilst the overall values may be lower the impact on local operations and on the income and expenditure account can be proportionately much higher.”

The currency market is a volatile environment, so how can charities address these challenges and are banks the best partners?

There are numerous challenges involved in procuring currency, particularly for those charities operating in volatile markets where the rate is influenced by less predictable economic and political pressures. This is experienced in areas including Turkey and Argentina. Local currency in these areas is prone to sudden and unpredictable fluctuation.

These regions are also typically ones that often require the most attention from charities and to ensure maximum impact it is vital to understand the level of risk and steps required to ensure effective aid delivery. Whether it’s a large international charity or a small one, all face the same issues with currency in emerging markets. Smarter procurement means better deployment.

Cost of an available service

Whenever a UK charity transfers money overseas, the process is often the same. Funds are being sent in sterling and then converted into the local currency at the final destination. The conversion will be made at the spot rate as a one off payment, potentially costing charities a significant and avoidable sum.

For example, if you were sending funds to a project in Burma and they convert the money into the local kyat currency you have no protection from rate fluctuation or local bank changes. If the rate has changed from the time you sent the funds to the point they convert the currency by 10%, your charity loses that money and can have 10% less effect on the ground. This potentially translates into a 10% drop in essential vaccines or 10% fewer hospital beds.

So where are banks in all of this? To them, everyone is a client whether they are an investor, corporation or charity. As is often the case, many charities rely on banks to help them send money overseas, despite the fact that the level of service, local knowledge of the country and rates are rarely the most competitive.

Even charities which procure millions of pounds a year are often not prioritised, with exotic currencies, such as the Nepalese rupee, not being made readily available at the best rate.

High donor expectations

Donors also have high expectations with the majority of charities receiving regular and substantial amounts in the form of restricted funds used for a specific project or goal. Provided in hard currency, funds are directed to the areas of greatest need, for example a country affected by a natural disaster, which in turn are often in economic turmoil and open to significant currency fluctuation.

Charitable giving has been steadily increasing as the economy emerges from the recession, with the Charitable Aid Foundation reporting an increase of £1.1bn in UK donations last year alone. Despite this being a positive indicator of stability, charities must still focus on reducing cost waste, with foreign exchange being an important factor that can provide substantial savings.

While every charity’s needs vary, the general principle of foreign exchange remains the same. Just as the fundraisers work round the clock to raise the funds, the charity’s financial team must implement a strategy that ensures the funds are reaching the intended destination in the most cost effective and risk-free way.

With all of these challenges in mind, procuring currency from a bank which may not have the local knowledge or take the time to gain insight into the charity and its operations is not the most logical option. In some cases foreign exchange specialists with local market knowledge can offer a better service and more competitive rates, having the ability to allocate a large portion of their time to the charity and its cause.

Real time analysis required

Currency is a complex market, with real time analysis required before any trade. Financial partners should be selected based on their expertise in emerging market currencies, forecasting and their provision of the most cost effective FX solution, now and five years in the future. They should also be able to offer a wide range of exotic currencies from the Papua New Guinean kina to the Ghanaian cedi.

It's not just down to the chosen partner to monitor and review trading activity; it’s also the responsibility of the charity's financial director. It will soon become clear as to what is adding value and what needs addressing, to allow for forward planning and realistic allocation of resources.

Value is not just about rates and deliverables; the chosen partner should be consistently reliable and efficient. The charity's financial director should closely monitor the performance and always seek consultation from other experts. He should ask, how quickly can the funds can be delivered? How does the proposed partner compare to other trading partners? Does it have experience in the local currency required?

The financial director should be focused on making savings and every possible point of the process, ensuring all donations go directly to the chosen cause.

Hedging against currency fluctuations

For those charities which regularly operate overseas, a forward contract is often an effective method of hedging against possible currency fluctuations. This takes the form of an agreement between two parties to buy or sell currency at a future point in time, for a rate agreed today.

It allows for forward planning, with charities knowing exactly what to budget for foreign exchange regardless of rate fluctuation experienced by the markets. This protects funds against currency risk and sudden changes in the local economy.

For every charity, it is vital to ensure that donations are stretched as far as possible and implementing a foreign exchange strategy – whilst often not an immediate consideration – can mean big savings.

Research, time and a little perseverance can yield big savings with every penny saved delivering greater impact for the beneficiaries. It’s important to accept that sometimes the more specialist financial service providers really are here to help at every step, and are able to offer a personalised service to charities, which are often overlooked by banks.

Ebury's Beverley Traynor - it is vital to ensure that donations are stretched as far as possible and implementing a foreign exchange strategy can mean big savings.
"There are numerous challenges of procuring currencies, particularly for those charities operating in volatile markets..."
Lee Bolton advert

Maximising Gift Aid in charities and their shops

Would you be surprised to read that Gift Aid donations have fallen in recent years? According to figures from HM Revenue & Customs at the end of 2013, the number of charities which made Gift Aid claims fell from 66,370 in 2011/12 to 63,740 in 2013.

That said, the profile of charities and, indeed, charitable donations continues to remain in the media spotlight. The infamous Ice Bucket Challenge campaign which went viral over the summer has made a significant impact on a number of charities including ALS.

At the time of writing, according to the BBC website, there have been in excess of 2.4 million ice bucket-related videos posted on Facebook, and 28 million people have uploaded, commented on or liked ice bucket-related posts. On Instagram there have been 3.7 million videos uploaded with the hashtags #ALSicebucketchallenge and #icebucketchallenge.

From 29 July to 28 August 2014 ALS received $98.2m - compared with $2.7m donated during the same period in 2013. Pre-ice bucket, the MND Association would receive on average £200,000 a week in donations. From 22 to 29 August, it received £2.7m.

In the UK, other charities have benefited with Macmillan Cancer Support raising £3m from challenges. Water Aid also saw a spike in donations, including £47,000 in one day - 50% higher than it ever received in a single day before.

Rewind a couple of months prior to that and the focus was on Stephen Sutton and his brave challenge to raise £1m for the Teenage Cancer Trust before he died. Current fundraising figures for his campaign are in the region of £5m.

Untapped potential in store

As highlighted above, there has been much focus on these mainstream campaigns fuelled by significant numbers of text and web donations, so what does this mean for those smaller charities who don’t have access to such a widespread audience?

Naturally, there aren’t going to be the opportunities to generate such large amounts in a short space of time, but this doesn’t mean there isn’t much that can be achieved simply by running a smarter ship. I would argue that there is much untapped potential within the stores and with a greater focus on the right IT systems and the right staff training, many charities would be able to make significant improvements to their Gift Aid collections.

One of the main issues faced by a number of charities is the current functionality of their legacy Gift Aid systems. Many were implemented a number of years ago, when the only solution was a system which had been adapted from the retail sector. The problem with these systems is that they were never designed with the needs of charities in mind, which has resulted in less than optimal performance for many who invested significant sums in the system.

As the years have passed, the value of the system has waned and so the importance of ensuring staff know how to ask and process Gift Aid has no longer been a key priority. Frequent staff turnover and multiple users contributes to this failure to pass on best practice learnings.

Unfortunately, this snowball effect has led to many charities becoming disheartened with the entire Gift Aid process and assuming that what they currently have is probably the best they can hope for. It is this mindset which is proving to be the biggest barrier to change and improvement in charity IT across the UK.

For those who are brave enough to embark on a period of change, however, the results can be dramatic. I will refer to one independent charity, with 10 shops and a large donation warehouse and distribution centre covering the Merseyside areas of St Helens and Knowsley. Despite operating on such as small scale, compared to larger, national charities, it is now claiming Gift Aid on up to 50% of purchases made across its stores.

This success has been achieved through two important measures: the implementation of a Gift Aid solution created specifically to suit the charity sector; and the appointing of a Gift Aid co-ordinator, who can oversee and train volunteers on how to approach Gift Aid donations at a store level.

HMRC cracks down on Gift Aid

Let’s move away from the commercial issues relating to legacy Gift Aid systems for a moment, as there are some more serious financial implications for those charities already claiming Gift Aid.

According to a report in Accountancy Age, the number of investigations undertaken by HM Revenue & Customs into Gift Aid claims more than doubled over the past year. Why is this a problem? Well, one of the major point raised in this article refer to a lack of adequate reporting and tracking systems in place by charities.

Wilkins Kennedy partner John Howard said at the time:

"The Gift Aid system can be quite complicated to administer, particularly for smaller charities whose systems may not be quite up to the mark to make sure all the "Is" are dotted and all the "Ts" are crossed. Many charities are aware of the difficulties and are getting better at managing Gift Aid, for example by putting tracking systems in place to claim back tax on sales of donated goods. However, ensuring all the paperwork is correct and in place remains problematic for many."

Need for second-generation systems

Let’s just take a moment to summarise the current position facing many charities large and small. There is an increase in the requests for charitable donations by more charities than ever before, fuelled by the viral nature of social networking sites and the media focus on high profile charity campaigns. There is a lack of understanding of how Gift Aid solutions can be maximised at a store level, meaning that many opportunities to claim Gift Aid are being missed.

The IT solutions in place are usually not quite the right fit for the charity, meaning that they aren’t performing optimally or providing the right tracking and analysis needed by management to really understand how Gift Aid is impacting the organisation. Add to this the fact that a tighter focus on Gift Aid claims by HMRC has heightened the need for more robust IT systems and you soon start to see the picture.

Charities really have no option but to review their current systems if they want to remain ahead of the game and avoid getting into hot water with HMRC. But what does this mean for charities which often find pushing through IT investment a challenge with the finance director, boards or trustees?

Firstly, it is important not to panic and assume you will need a complete overhaul of all systems. Often, there can be ways to work with your existing system and just "bolt-on" the additional bits that are needed.

When there is a need to replace entire systems, a simple calculation of expenditure vs. increased returns can help justify the financial costs of change. For many charities which have taken this step, they’ve seen that the costs of their new system more than paid for themselves within the first year of implementation.

It is also not necessary to overhaul an entire network of stores all in one go either. It is advisable to start small and work on implementing a new system in one store first, before considering a full roll out. The success achieved in this one store alone,will also help in justifying the costs of a further roll out.

Mind over matter

It is important to remember that it is not just the technology that will make the difference. There needs to be a shift in attitude across the entire charity and a focus on ensuring that the importance is communicated from the top right down to every individual team member, even the occasional and temporary volunteers. I refer again to an example of a charity which took steps to implement a Gift Aid co-ordinator to help train staff across its network of stores.

Many of the largest charities in the marketplace are currently only achieving less than 20% Gift Aid return on donations, so the 50% levels achieved by this particular charity were excellent and really reflect the commitment from the charity as a whole, as well as the dedication of the Gift Aid co-ordinator to making Gift Aid a core part of the day to day business operation.

In summary, the challenge to maximise Gift Aid in store remains, but with the right mindset across the entire organisation and a fit for purpose Gift Aid solution, charities which have taken these steps are already reaping the rewards and increasing income from existing business, without having to invest in additional resources. For charities keen to maximise return on existing resource, this is proving to be a real win-win solution.

BMc Azurri's Alastair Petrie - there needs to be a shift in attitude about Gift Aid across the entire charity and a focus on ensuring that its importance is communicated from the top right down to every individual team member, even the occasional and temporary volunteers.
"...the snowball effect has led to many charities becoming disheartened with the entire Gift Aid process and assuming that what they currently have is probably the best they can hope for."
"...the number of investigations undertaken by HM Revenue & Customs into Gift Aid claims more than doubled over the past year."