Taking control

Financial management involves taking a historic view of your group's finances. By looking at your past records of income and expenditure, you can form an accurate idea of what you are likely to receive and spend in the future - otherwise known as budgeting and forecasting.

Budgeting and forecasting

Budgets are much more than an arithmetical exercise - they are a fundamental element of planning and management. Management is about decision taking and this means making assumptions about the future. The best way to get an accurate forecast is to study the past performance of the organisation and identify trends. Looking at monthly figures rather than annual performance figures will naturally give earlier warning of any change in trend.

Clearly if income can be predicted with a high degree of certainty, a finance manager can agree to future expenditure. In a less certain income climate, management will need to find ways of protecting the organisation from risk by reducing commitments and increasing reserves.

Costs

Its very important to accurately measure the cost of your activities. List your various activities then systematically look at the costs of running each of them. It is helpful to categorise them as either fixed or variable costs. Fixed costs are those which stay the same whatever the volume of output and variable costs increase or decrease directly in proportion to volume.

Think of the cost of using a car over a year - the fixed costs will include tax and insurance, whereas the costs of petrol and repairs, which will change according to how much the car is used, are variable. For more information about fixed and variable costs and calculating your break-even point - see the costs activity and break-even activity.

Services provided by the voluntary sector might not always be the most cost-effective, and any financial manager will have a difficult juggling act trying to provide high quality services that users can afford, while keeping a close eye on the financial health of the organisation.

Comparisons between the commercial and non-profit sectors

Monitoring and reporting

Measuring performance in non-profit organisations is much more problematic than in a commercial enterprise, where the return on an investor's capital is the key performance indicator.

There is a legal obligation for all organisations to account for their income and expenditure - see the accounting section for full details.

Management reporting requirements are less prescriptive as they tend to deal with matters of judgement and details peculiar to an individual organisation. Good practice requires that financial management information should be available on a regular basis, as often as necessary for decision taking and at frequent regular intervals for monitoring purposes. For the smaller charity quarterly reports may be sufficient but for larger charities should aim for monthly management accounts.

Being on top of your cash-flow is crucial. Be certain about how much money is in the bank and what you can afford. If a large number of receipts are coming in, it's advisable to report on a daily basis.

Financial reports are rarely sufficient in themselves and should be accompanied by quantitative information wherever possible. This is especially important in the case of services to beneficiaries.

A financial procedures manual

It is well worth keeping a financial procedures manual. This will allow the relevant staff - and your management committee - to consult and operate within its specifications. You will need to decide which of your members or employees is allowed to authorise spending, and how much each person is able to spend before they must check with their manager. An office assistant, for example, might have a spending limit of £100 for items of petty cash, while a department manager might have a limit of £5,000. All these details need to be recorded in the procedures manual and included in training programs.

Tax matters

In general, non-profit organisations are exempt from income tax under the Taxes Act 1988 and from capital gains under the Chargeable Gains Act 1992. Where a charity has trading subsidiaries it is common to transfer any profit away from the subsidiary into the charity by way of a profit-shedding covenant, thereby reducing or eliminating any liability for tax on profits.

In general financial managers should make sure they properly classify receipts on which tax may be recoverable. There are specific reliefs, which include:

• Covenanted donations.
• Gift aid relief for single gifts.
• Gifts free of capital gains tax.
• Gifts free of inheritance tax.
• Gifts from charitable trusts.
• Covenanted salaries.

Needless to say these aspects of financial management are affected by complex statutory regulations which are liable to change from year to year. You may need professional advice to keep abreast of opportunities and threats in this area.