1.2 Financial statements
Organisations produce various statements or reports relating to financial information. For example:
- Statement of Financial Activities (SoFA): registered charities are required to produce this statement. It details their surplus and deficit (rather than profit and loss, which is the terminology of private sector organisations). The SoFA is part of the annual report.
- Balance sheet: details assets, liabilities and funds held.
- Cash flow statement (applies to larger organisations): analysis of movements of cash (and equivalent, such as investments), including all income and payments made. This helps to assess the organisation’s liquidity and solvency. See Table 1 [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] for the categories included in a cash flow statement.
- Annual reports: if an organisation is a registered charity, by law it has to lodge an annual report every year with the appropriate charity regulator for the part of the UK in which the charity operates. Annual reports generally highlight the organisation’s main activities, achievements and challenges for the year, as well as information on expenditure and funding received from grants, contracts, donations, and income from investment and trading activities. Annual reports are useful ways to inform stakeholders about the organisation’s work.
- Budget: these are internal documents that detail the organisation’s income and expenditure for the coming year. You will read about these later this week.
Although you may not be involved in any of these statements or reports, this overview of the key statements and reports will hopefully give you a sense of the requirements and regulations your organisation might be subject to.
Box 2 outlines some financial management tips for small charities.
Box 2 Top tips
What essential finance processes are needed?
The foundation of good financial management in small charities is to keep it simple. Basic accounting records are a must to keep track of spend. A simple spreadsheet could be used to chart income versus expenditure. What’s important, however, is that these basic records are kept up to date, with bank reconciliations taking place at least once a month. A cash flow forecast should also be created to predict movements in the bank account in forthcoming months. It is also important to have a good filing system or referencing system so any document or information needed can be easily retrieved.
Set up good processes and controls and involve others in financial management. Processes need to be established and documented for managing all aspects of finance, including monitoring the use of restricted and unrestricted funds, the authorisation of purchases and signing off when something can be paid. […]
In a small organisation, maintaining the books and records will often be sole responsibility of one person but this can be a mistake. No one person in a charity should be responsible for this and processes must be communicated and understood by everyone in the organisation.
Accounts – keep it simple and create a narrative
Even small charities need regular management accounts presented in a clear and simple way for senior managers and trustees to understand. One tip is to create a simple narrative to go alongside the numbers, so whoever is reading it, from the Chief Executive to the trustees, can answer any questions the numbers throw up. Sometimes the inclusion of bar charts or pie charts can make it easier for others to understand the accounts.
Annual statutory accounts also need to be produced by the organisation, which clearly represent its financial activity and current situation. The finance person must plan ahead and know when these are due so the accounts are prepared and filed in good time. The advice here is to keep them simple and include a good narrative to bring the numbers off the page. Financial performance should be linked with the activity to illustrate the impact the charity is having. This also ensures the charity complies with the annual statutory reporting requirements.
Activity 1 Thinking about financial information
You will now reflect on your own experience of financial information. This might be in a paid or an unpaid capacity for an organisation, a group or at home.
Which of the following have you been involved with?
- Preparing accounts
- Helping with an annual report
- Collecting and counting money at a local event
- Costing some activities; for example, plants for a garden, new equipment
- Writing an application for getting some funding
- Providing information for a budget
Were there any you felt less confident with? If so, why?
You will look later at budgets and costing. Often people feel unsure about financial information, as they worry their maths is not good enough or they do not understand what the accounting jargon means. If you work in a team, then hopefully there will be someone to work with you or to provide guidance. Being methodical about what you have done and keeping notes will help. As mentioned in Box 2, writing a ‘narrative’ or producing charts and graphs can help you make sense of your financial information.