Charities are purpose-led organisations, established to make positive change. However, as stewards of public funds, trustees must operate within strict legal parameters, directing resources towards making a difference. Both existing and potential donors need to be assured that a charity is financially sustainable and professionally managed before they offer their support.
An integral value of the charity sector is maintaining transparency, so that all interested parties are clear on what the activities of each charity are and what is being achieved. Sadly, isolated cases of malpractice have influenced wider perception and spread scepticism. Therefore, charitable organisations are coming under increased scrutiny, particularly with regard to their finances.
This article will cover some of the key misconceptions the public have about how charities manage their finances and help clarify the facts.
1. Utilising donations
Research shows that donors want their donations to be spent on front-line activities that directly impact beneficiaries.
This has meant some charities feel pressure to claim that all income raised is directed towards these activities, and any expenditure on overheads is often underplayed. Practically, this is rarely (if ever) possible, as it takes investment, management and administration to keep their charitable processes running optimally.
Many of the requirements that modern charities must meet, such as health and safety, safeguarding, internal controls and data security all cost money. Alongside this, staff and volunteers will require training to ensure that they are performing to the best of their ability.
To effectively manage these overheads, trustees and management should be clear on the cost base, so they can monitor where the money is going and whether this is helping them achieve their purpose. From a practical point of view, knowing the overhead percentage will facilitate more productive communication with (potential) funders, who will understand with greater confidence where their resources will be used.
A key mantra of charity accountability is ‘explain and justify.’ Trustees need to ensure donors, and other users of their accounts, understand that support costs are essential.
2. Paying staff
Many people do not understand the necessity for some charities to have employed staff; they assume that, with sufficient volunteers, this is a needless drain on donations.
Whilst some activities can be assigned to volunteers (including trustees), operations often reach a scale where dedicated, paid staff are needed for capacity and specific skillsets.
In recent times there has been particular attention on charity CEO’s salaries.
The Pay and Equalities Survey of the Association of Chief Executives of Voluntary Organisations has said that the median basic salary for charity CEOs in the UK was £56,000 in 2022 (compared to £60,000 when the survey first began in 2013). This demonstrates that whilst some of the bosses at larger charities are earning big wages, this is not universally the case.
It’s worth remembering that running a charity isn’t necessarily easier than managing a big business; indeed, leading and managing a charity is arguably much more complex.
To satisfy the public, charities must ensure balance in their remuneration policies, demonstrating that their financial decisions are motivated by maximising public rather than private benefit, whilst offering sufficient salaries to attract the people with the experience and capabilities they need. Meeting and exceeding the accountability disclosure requirements in your annual accounts by being transparent about wages, benefits and other expenses paid to management and trustees will bolster the trust in your charity.
Voluntary income is the charity sector’s largest source of income.
On average, the UK Civil Society Almanac shows that for every £1 spent on fundraising, a charity receives over £4 in return.
A key metric that is often cited to demonstrate how effectively a charity has raised funds is the relationship between yearly income and the cost of raising it. Due to the unique nature of the sector, the correlation between the figures is unpredictable, making it an inadequate performance indicator.
Some forms of public fundraising, such as in-person collections or direct mail, require a significant initial investment that will yield a return a year or more in the future. Other strategies, including legacy fundraising can require years, or even decades, of investment, but can be worth it for the high returns available. Fundraising activities, such as networking between trustees require very little investment of money or man hours.
Running trading subsidiaries, which are dedicated to raising funds, or investment management fees for charities holding endowments or large investment funds, can also be attributed to fundraising due to their classification in the accounts.
Raising money can rarely occur without an initial investment. Fundraising ratios need to be taken with a pinch of salt.
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To discuss any of the topics covered in this article, please contact us and we will be happy to help…