Financial health checks

Why do it?

Voluntary organisations need good financial systems to avoid running out of money and to avoid allegations of fraud. Good financial systems enable the charity to spot problems quickly and adjust activities to maximise the effectiveness of their funding.

Poor financial systems can exist for a number of reasons.

In small organisations, it may be that this area has never received any real attention other than looking at the bank balance at the end of each month and guessing the expenditure for the next month.  The volunteers who run the charity may have focused their efforts on the main task of the charity – such as arranging summer holidays for disadvantaged children – and no one has ever had the energy to sort out the bookkeeping on a regular basis. Financial papers are given to the independent examiner every year who “sorts it all out”. See CASHFACTS Audit & independent examinations.

This type of approach is fraught with risk. It is easy for money to be misappropriated. Twelve months after the event pieces of paper are often missing and verbal explanations have to be given which are frequently little more than guesses. Funders, understandably, would be unhappy if they knew that there was very little control over the finances – and they could withdraw their funding. People with grievances can make allegations to funders – true or false – about poor financial management and fraud.  The money is not your money, it is the beneficiaries money so you should be able to account for it.

Large organisations

In larger organisations, financial health checks are useful because staff may not have relevant training or may not be aware of the specialist accountancy needs of voluntary organisations. The charity might have expanded over time with no one focusing on whether the financial systems have been strengthened to reflect the greater demands being placed on them.

Check-ups

An occasional check is a very good way of ensuring that staff are working well. Lax conditions often arise when no one appears to be interested in a particular area of the organisation. Anybody with common sense could be asked by the committee or manager to undertake a financial health check. We have detailed below the main topics that should be covered.

Objectives

Read the objectives of the charity in the governing document and check that the activities and fundraising applications fall within the stated objectives. If there is a problem it may be necessary to revise the governing document or change the activities of the charity. If your charity wants to take on contracts it may be better to become a charitable incorporated organisation (CIO), if you aren’t one already.

Achieving outputs

Is the charity doing what it is being paid to do? Ask for copies of all the funding agreements, application forms and letters applying for funding. Make a list of the services that the charity has agreed to provide and a list of what has been provided. What do you still have to provide? Can it be done within the time provided for in the funding agreements/contracts?  If everything you have promised to do cannot be done in time should you try to renegotiate the agreements and extend the timescale or even replace outputs that you have not achieved with unfunded outputs that you have achieved.

Budgets

A budget should be drawn up before the start of each financial year and approved by the management committee. If events are significantly different from that forecast then the budget may need revising during the year.

If you produced a full cost recovery model and worked out unit costs, depending on how the budget is performing, you may need to revise these. You may want to think again about the indirect costs in future funding bids. See CASHFACTS Full cost recovery and CASHFACTS Unit costs & pricing.

Management committee

The committee needs a report at least every three months comparing income and expenditure with the budget. This helps to ensure that the charity does not overspend and run out of money during the year.

Trustees

The organisation should have a competent active treasurer and trustees should be aware of their financial responsibilities.

The Charity Commission has an overview, Charity trustee: what’s involved, and also publishes practical skills advice.

When it’s published, CASHFACTS Trustee financial responsibilities will give detailed information specifically designed for small charities and community groups.

Cash expenditure

Cash income – coins and pound notes – and cash expenditure are the areas where voluntary organisations have the most difficulty. Months after an event, organisations can be totally baffled as to how money was spent, or what the total amount of income and expenditure was. Payments by cheque, debit cards/credit cards/electronic payments are much simpler because records of payments can always be obtained from the bank.

Cash expenditure should be kept to a minimum. If it exceeds £100 a month in an organisation with a turnover of less than £30,000 consideration should be given to what payments could be made by cheque/electronic payments in future.

Petty cash

There should be a lockable cash tin.

An imprest system should be used (See CASHFACTS: Accounting for cash). This means the organisation has a float of cash – say £100. When the majority of the money has been spent, say £78.27, the float is topped up again to the original float of £100 by cashing a cheque for £78.27.

CASH recommends this system because errors are easily spotted and people can be asked to find missing receipts – train tickets etc. – or explain why the tin is short of money. For each payment, there should be a voucher signed by the person receiving the money and by the person authorising the expenditure. Check that the vouchers and the cash in the tin add up to the level of the float. If they do not, ask those who have access to the cash tin for explanations. The petty cash book should be balanced with the tin and signed at least once a week.

If an imprest system is not used check that the cash paid into the tin equals the expenditure plus the remaining cash in the tin. Start from when the petty cash was last balanced or from the start of the financial year. As with the imprest system, there should be a receipt whenever money is withdrawn or added to the tin.

The organisation can have more than one float. Different individuals may have floats and petty cash accounts can be set up for different events such as a summer family day or celebration.

Payroll

If your organisation is employing staff, key payroll  issues include:

  • Adequate records being kept including addresses and evidence of the right to work in the UK.
  • Monthly information given to Her Majesty’s Revenue & Customs (HMRC), via real-time information software, along with monthly payments being made
  • Annual information given to HMRC, along with annual payments made
  • Duties such as automatic enrolment in workplace pensions being carried out correctly

For detailed information see CASHFACTS Payroll: CASH’s advice and guidance.

CASH advises groups to use a payroll service.

CASH operates a payroll service, see our Accountancy Services. It costs £5 per payslip: CASH Payroll service price list. Phone us for more information (020 8969 0747) or email deborah@cash-online.org.uk

Self-employed

Organisations have to be careful that someone is genuinely self-employed otherwise they will be responsible for the person’s income tax and national insurance.

HMRC has a summary of how to identify someone as self-employed and what the tax and employment rights are: there is also an online tool

You can also phone for guidance if you are still uncertain.

For more information see CASHFACTS Charity tax: an introduction.

Volunteers

Small charities and community groups should only pay strictly out of pocket expenses, the most common being for a meal and travel. All payments should be signed for by the person receiving the money and the person making the payment.

Are good records being kept?

When paying expenses you have to be wary of not creating a contract of employment which would give someone an entitlement to the minimum wage and various rights.  A signed volunteer agreement can reduce the risk to the charity. There is more information on NCVO’s Volunteer Centre section on its website.

Various benefits given to volunteers can be eligible for tax, for instance, the purchase of a computer. There is a complete list of what may be taxable on gov.uk.

See CASHFACTS Charity tax: an introduction.

Reserves

Your charity should have a reserves policy. The Charity Commission states, “If you are preparing accruals accounts, by law you must set out your reserves policy – or reasons for not holding reserves – in your trustees’ annual report”.

The reserves should cover the funding required to bridge the gap to a new source of funding or allow for an orderly winding up of the charity’s affairs should this become necessary.

Typically a charity might plan to have reserves of between 25% and 50% of annual expenditure.

We will cover this subject in detail when we publish CASHFACTS Reserves policy.

Reporting to Companies House

Charities that are companies are required to submit an annual return online to Companies House, now called a confirmation statement. Charities that are companies have to file annual accounts online with Companies House.

It is best to complete these tasks as soon as your annual accounts have been signed off.

There are penalties for late submission. Visit the Companies House website to discover if your organisation is up-to-date with its submissions.

Corporation tax and registering with HMRC

Charities don’t have to pay tax on most types of income if it’s used for “charitable purposes,” this includes donations and profits from primary purpose trading. For instance, if you are a community transport charity and you also repair cars for the public you are allowed sales up to a threshold related to your turnover before you start to pay tax.

Rent income is normally tax-free, but you need to look at the details. Renting an empty room will be tax-free, renting a room full of recording equipment is likely to be deemed to be providing a recording studio service and could be taxable.

See HMRC’s guidance to small trading tax exemptions.

HMRC has a guide to when charities may or may not qualify for tax relief. In order to gain relief, you need to get recognition from HMRC through an online application.

If your charity has income that doesn’t qualify for tax relief you must complete a corporation tax return online.

If your charity has been granted an exemption from completing corporation tax returns and has not become liable to pay tax during the year you don’t fill out a corporation tax return unless your charity is selected by HMRC as part of a sampling or checking exercise.

See CASHFACTS Charity tax: an introduction for more information.

Is your organisation registered correctly with HMRC and are you up-to-date with returns?

As part of our Accountancy Services CASH can help you complete your group’s corporation tax return. Fee around £100.

Fundraising strategy

Has the organisation identified adequate sources of income for the next twelve months and does it have a fundraising strategy covering the next three years?

Are enough current fundraising applications being made, taking into account that many may not be successful? Typically it will take four months or more for an application to be approved. There will also be a period before the money is received.

See CASHFACTS Fundraising for more information.

Financial controls

Is there a written set of rules covering who can sign cheques or make electronic payments etc? Do they need to be revised?

We will cover this subject in detail when we publish CASHFACTS Financial controls.

Computerised accounts

Is the system functioning well and are you using the right package for your needs?

Unless you are using an online system, such as QuickBooks Online, or an automated backup system such as Apple’s iCloud, are regular manual backups made of data to an external storage device?

Is there adequate protection from viruses and online scams?

We will cover this subject in detail when we publish CASHFACTS Accounting software guide.

Insurance

Does the charity have public liability – and if relevant – office contents, employer’s liability and vehicle insurance?

Consider what other insurances might be needed and whether the amounts covered are high enough. See the Charity Commission’s How to insure your charity. We will cover this subject in detail when we publish CASHFACTS Insurance.

The site VolResource has a list of insurers, including various specialist.

Pensions

Employers have to provide a workplace pension for eligible staff. The HMRC website gives guidance to “automatic enrolment“. You must pay at least 2% from April 2018, rising to 3% in April 2019. The Pensions Regulator has tools for employers.

Some charities opt to pay above the statutory minimum pension contribution as part of their strategy to recruit and retain staff.

Does your organisation have a pension policy? Sometimes it is in the staff handbook.

Staff loans

Ask if there are any loans outstanding to individuals? Generally, this is not good practice, but loans are sometimes made for annual travel season tickets.

There should always be a written agreement allowing the loan to be repaid through deductions from salary.

Salary sacrifice

A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit (such as nursery vouchers)

Have the rules changed since you set up the scheme? More information from HMRC.

Stock control

Does the organisation hold significant stocks of items for resale such as books, or are there large amounts of office stationary etc? Bearing in mind the cost of administration, would it be wise to introduce a stock control system? Are you holding more stock than necessary and is there a risk of petty theft? If you run a kitchen cooking meals for the elderly, does the level of raw food purchases look reasonable when compared to the number of meals provided?

Fixed-asset register

The organisation should maintain a list of fixed-assets, with details of cost, depreciation policy, serial numbers and where items are stored. Typically this list would cover items valued at £100 or more and include items like computers, office furniture, catering equipment in a community centre kitchen etc.

Is the register up-to-date and accurate?

See CASHFACTS Fixed-asset register for more information.

Next steps

Now write an action plan with a timetable for rectifying any weaknesses.

As part of our Accountancy Services CASH can undertake a financial health check on your organisation, either looking across the range of your procedures or focusing on the payroll.

Prices range from £200 to £500 depending on the size of your organisation. Phone 020 8969 0747 or email tom@cash-online.org.uk.

If you’re specifically interested in payroll phone 020 8969 0747 or email deborah@cash-online.org.uk

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In this factsheet we have referred to other CASHFACTS we plan to produce. Follow/like us on Twitter and Facebook and/or subscribe to CASH eNEWS and we’ll let you know when these are published.

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CASHFACTS Financial health checks is reviewed at the start of every financial year. It may be amended throughout the year. If you want to be informed of major updates subscribe to CASH eNEWS or follow/like us on Twitter and Facebook.

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