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Financial Management & Charity AccountsDay 2
Financial communications
•Need to monitor activities•More importantly understand what the figures are “saying”•Then take action!•For instance monitoring cash flow to ensure that a crisis does not ensue•Using ratios to monitor and act on different areas of activities:
• Occupancy rates – if you are operating a housing charity, this will allow you to decide the level of occupancy you need to maintain
Taking decisions
•Return on fundraising:This allows you to compare different methods and decide on the most effective one=Funds raised x 100%
Cost of doing this•Use this method to complete the Fundraising exercise
External Reporting
•Some form of external financial reporting is required of all organisations•This could be to investors, funders, key stakeholders, banks, lenders, suppliers, landlords etc.•All limited liability companies have to supply accounts to Companies House, Financial Conduct Authority (Co-Ops) or the Charity Commission (CIOs)
Basis
•Legislation is mainly aimed at commercial organisations•The reporting is known as Financial Accounts•These allow a degree of transparency•Information is over-arching and not operational•The information has to be provided annually All limited liability companies have to supply accounts to Companies House, Financial Conduct Authority (Co-Ops) or the Charity Commission (CIOs)
Legal Framework
International accounting standards
CompaniesAct
CharitiesAct
SORPStatement of
recommended practice
Charity Commission & Cabinet
Office
Commercial company accounts
Financial accounts
•Financial accounts summarise the activities of the previous 12 months•They provide information on a company’s activities and ability to manage assets and risk•These do not include operational information – though they are based on this
Commercial financial accounts
•At their simplest the financial accounts consist of
•An income and expenditure account (or Profit and Loss account)•A Balance sheet•A cash flow statement•A directors report
Profit & Loss Account
•This is a summary of transactions over a stated period•Usually the previous 12 months•Information formatting is mandatory•Disclose level of generated income and profitability
•Income•Direct costs•Other costs•Profit before tax
Profit & Loss Account 2
•Profit belongs to the owners of the company (investors)•Profit not distributed (as a dividend) increases the net worth of the company•The profit is used to create or buy assets or is in the form of cash and is added to the accumulated profits brought forward from prior years
Balance Sheet
•The balance sheet is a record of an organisation’s net worth, this is the difference between:•Assets
•Something you own, and•Liabilities
•What you owe someone else•The balance sheet is stated for a specific date – usually the financial year end
Balance Sheet
•Fixed assets •those used on a long term continuing basis
•Current assets•those you expect to sell or convert into cash within 1 year
•Current liabilities•amounts you expect to pay within 1 year
•Long term liabilities•amounts payable not within 1 year
Balance Sheet – Equity/Net Worth
•Capital invested•money introduced by owners
•Retained profit •what has been earned/saved by the company
•The equity amount does not belong to the company it belongs to the owners
Profit & Loss vs. The Balance Sheet
•The balance sheet captures the timing difference between items in the profit and loss account and actual cash movement, the differences are usually:
•Timing differences•Loans & Loan repayments •Fixed assets movements•Depreciation/Amortisation•VAT
Commercial Accounts Exercise
•Please undertake the NewCo exercise to complete a simple set of financial accounts
Charity Accounts
•Charities are funded through “Gifts” & operating activities•You cannot invest in a charity•Unused income is not a profit•Not available for distribution but for continuing public benefit delivery•These are called surpluses•At a financial year end surpluses are reflected within the various reserves of the charity
Charity Accounts - 2
•Resources received, that is cash and non-cash items, can be either:
•Restricted: can only be used for a specified activity•Unrestricted: can be used as the trustees/ management see fit
•New SORP wants to distinguish between endowments (restricted “investment”) and “immediately usable” resources• So measuring resource sourcing, allocation & utilsation
Charity Accounts - 3
•Unrestricted funds can be used towards non-project related or “Core” costs•Available unrestricted funds can be used for supporting shortfalls in restricted funded projects - but not the other way round•Charities increasingly diversifying income sources to generate more unrestricted funds
Types of accounts
•Receipts & Payments•Cash in cash out basis - simple
•Accrual •Have to take into account items not collected or not paid within the period i.e. Have to “accrue” for these amounts•This methodology gives a more accurate picture of a charity’s activities & performance
Legal structures
•2 types of charities•Voluntary association – not legally recognised and trustees/ management committee personally liable for all activities•Limited liability companies
•Companies Limited by Guarantee (& then receive charity registration)•Charitable Incorporated Organisation•Company Limited by Shares/ Royal Charter/ Co-Operatives
AdministrationWhat Who
Accounts preparation All charities
File within 10 months Unless non company charity & income
Format
•Accounts need to follow SORP format•They need to include a Statement of Financial Activity (SoFA), a balance sheet, a cash flow statement & the Trustees Annual Report•There need to be accompanying notes to explain the financial statements
Reading accounts
•Common format eases understanding•Should inform on:
•Performance•Delivery•Use of funds•Management of funds•Viability & sustainability•Investment decisions•Engagement & trading
•This is often done using ratios to test cash flow, speed of collecting debts and settling liabilities etc.
Income & endowments
Categories Types What?
1. Income from Donations & Legacies
Income from donations & legacies
grants/legacies/donations(no expectation of a service in return)
Other trading activities Non charitable trading activities/ fundraising activities
Income from investments interest/divis/rent
2. Income from charitable activities
Fees or grants rec’d specifically to deliver services & activities
Grants/fees(Contractual to further charitable objects)
3. Other income Whatever does not fit above Unusual items e.g. sale of fixed assets
© Red Ochre 2016
SoFA Recommended Format
Explanation Endowment£
Restricted£
Unrestricted£
Total£
Last Year£
Sources of Income + + + + +
Matched Expenditure - - - -
Surplus/Deficit = = = = =
Reserves B/Fw’d + + + + +
Reserves C/F’wd + = = = =
© Red Ochre 2016
Expenditure
Match type of incoming Resource What is included
1. Expenditure on raising funds Costs of generating donations and legacies (fundraising / publicity). Cost of goods sold. Investment management costs
2. Expenditure on charitable activities Includes governance costs which will be a separate component of support costs
3. Other expenditure Anything else
4. Support costs Costs that allow other activities to be undertaken shown in the notes to the accounts for those reporting on an activity basisGovernance costs now to be included within this note
© Red Ochre 2016
Balance sheet
£ £
Fixed Asset +
Current assets
Cash/Debtors +
Current Liabilities
Creditors -
Net Assets +
Long Term Liabilities -
Net Worth +
© Red Ochre 2016
Statement of Cash FlowsCash flows from operating activities: Total Funds
£Last Year
£Net cash provided by (used in) operating activities- SoFA net funds adjusted for non cash items and non operating
items
X X
Cash flows from investing activities:Divis, interest, rentSale of assets & investmentsPurchase of assets & investments
Net cash provided by (used in) investing activities
XX
(X)X
XX
(X)X
Cash flows from financing activities:Repayment of borrowingCash inflow from new borrowingReceipt of endowments
Net cash provided by (used in) financing activities
(X)XXX
(X)XXX
Change in cash & cash equivalents in this reporting periodCash & cash equivalent at beginning of the period
XX
XX
Cash & cash equivalents at the end of the reporting period X X
© Red Ochre 2016
Reconciliation: Net movement of funds to cash flow from Operating Activities
Current£
Last Year£
Net movement in funds as per SoFA X X
Adjusted for:Depreciation chargesDivis, interest and rents from investmentsLoss/ (profit) on sale of assets & investments(Increase)/ decrease in stocks(Increase)/ decrease in debtors(Increase)/ decrease in creditors
X(X)(X)X
(X)X
XX
(X)X
(X)X
Net cash provided by (used in) operating activities X X
© Red Ochre 2016
Reserves
FUNDS OF A CHARITY
UNRESTRICTED INCOME FUNDS
RESTRICTED FUNDS/SPECIAL
TRUSTS
GENERAL INCOMEDESIGNATED ENDOWMENT
© Red Ochre 2016
Endowment Funds
•Restricted fund held on trust for the charity as a capital fund
•If have to maintain whole of fund –permanent endowment•If discretion to convert to income –expendable endowment
•Receipt and changes of endowments have to be disclosed on the SoFA
Reserves disclosure
•Have to describe reserves policy•Why reserves held – future intention•Ability to avoid financial problems
–CC guidance – should maintain 3 months of unrestricted reserves–These are the costs to close charity down if necessary, e.g. Redundancy, or–Buffer to secure further funding
Charity Accounts Exercise
•Please undertake the New Health exercise to complete a simple set of charity financial accounts
Trustee’s Annual Report
Responsibility of the trustees Essential marketing document but has to be
audit compliant What most stakeholders will read The trustee report expands on what the
charity has done and what it will do in future (strategy/ public benefit)
Risk policy Reserves policy It is “colouring” in the bits that the figures
cannot tell
© Red Ochre 2016
TAR Framework
Who are we? Reference and administrationHow do we work? Structure, governance and
management
What are we doing? Objectives and activities
What did we do and how well did we do it?
Achievements and performance, use of KPIs
How did we afford it? Financial review
What are we planning? Plans for future periods
Managing risk Risk assessment
What else do we look after Custodianship