CFG have just launched the 2015 Adrian Randall Challenge Prize. This guest blog is from Hilary Seaward, the recipient of the inaugural prize in 2013.
Hilary won the prize for a proposal based on helping finance directors make management accounts more accessible when reporting to their board.
In this blog, Hilary reflects on the continuing importance of this, especially in light of recent scrutiny of charities in the media.
Like it or not, all charities are finding themselves in the spotlight at the moment. And it seems everyone has an opinion on how they should be run.
Not surprisingly, good financial management comes pretty near the top of everyone’s list. Trustees are accountable, so it stands to reason that they must take the blame if the finances turn out to be a bit wobbly.
But trustees are appointed for a vast range of skills that they bring to an organisation. So is it fair to assume that all of them can read the accounts presented to them and be able to make strategic decisions on the short and long term health of the charity?
CFG recognised this as a potential problem two years ago when they awarded me the inaugural Adrian Randall Prize to look into just this question.
How do you present vital but complex financial information so that it can be understood easily by all trustees, not just those with a financial background or expertise?
I think the problem falls into 2 areas.
The first is one of engagement. Financial accounts, or reports – call them what you will – must capture the imagination of the reader and should pose more questions than they answer. They are a map showing where the charity is now and where it is heading. But some maps are easier to read than others; most of us can manage to understand a street map but we would be all at sea, literally, if all we had was a nautical chart, something which requires years of training to understand – much like accountancy in fact.
I have suggested one way to approach the problem, by reducing management accounts to no more than 3 pages. But some may feel that the matter is adequately dealt with by providing a dashboard and taking a balanced scorecard-like approach.
However you can have as whizzy a dashboard of your projections as you like, or as many graphs as excel will provide, but they are no use if the underlying figures turn out not to be sound.
This is the second problem – one of transparency.
The most important question trustees need to know the answer to is have we enough money to meet our obligations?
Can they answer that question themselves from the information given to them?
Perhaps it’s clear there is enough money at the moment, but will there be 3 or 6 months ahead, let alone this time next year?
Can they tell easily for themselves what the charity is contracted to spend in the next few months?
And more crucially of the projected income, how much does the charity know it’s going to get, and how much of it is it hoping to get?
To address this transparency problem I’ve suggested a method which I’m calling Possibility Accounting.
It splits out the forecast figures into 2 categories: what is committed, so trustees know exactly where they stand, then what is unsure but hoped for.
This second category is further split to give the trustees a better grasp of just how speculative some of the income, or expenditure might be. This way there is hope that there will be fewer unexpected surprises.
No one says the road is going to be easy. No matter how good you think your cause, the ultimate responsibility to provide services to beneficiaries both present and future lies not with the fickle funders – but the trustees and senior management. They deserve to be given a good map to guide them.
ACEVO’s Understanding the Numbers Masterclass
If you find finance and numbers bewildering, join us on 3 December for ACEVO’s Understanding the Numbers Masterclass. This one-day hands-on intensive session will use relevant examples and case studies designed to take your understanding on matters financial up to the next level.
On the day you will discover:
- the critical numbers at the heart of good financial management
- how to recognise and make the most of the resources you have
- key questions to have in mind as you look at pages of figures
- the importance of forecasting
- how to make sense of the different types of funds
- easy to digest ways of understanding depreciation
- how to set practical budgets in ways that will work for you