It is curious to see the very different reactions to how charities spend their money. In the last month I have seen one newspaper lambasting a charity for spending "only" 75 per cent of its income on charitable activities. By contrast, the Charity Commission issued a brief report looking at low levels of charity spend, but its focus is on a measly 10 per cent.
Perhaps that neatly indicates the gap in public perceptions. The lessons from this apply to all charities – funds are there to be applied to good causes and the use of funds, whether retained or spent, needs proper explanation.
At the same time, there seems to be a renewed focus on clarity about tax - not just understanding how it works, which was the focus of HM Revenue & Customs' recent comments on Gift Aid, but how charities handle their own tax. Mirroring the rumpus over VAT discounts in airport retail outlets, it is reported that some not-for-profit organisations have behaved similarly. The Daily Telegraph alleged that golf courses, leisure centres and other sports clubs have not passed on some VAT savings after a change in the VAT treatment of charges by non-profit organisations for non-members' activities. Not all such organisations are charities, so it's worth noting the updated online list of community amateur sports clubs registered with HMRC. This list can be used by donors who want to support those organisations using Gift Aid.
Whether or not you regard failing to pass on VAT savings as unethical, trustees should ponder the results of a survey by the Chartered Institute of Management Accountants, which claims that a significant proportion of finance professionals (30 per cent) feel pressured to compromise their ethical standards – it was only 18 per cent in 2012. A fifth (21 per cent) say people who report concerns about poor behaviour are earmarked as "troublemakers".
Having open and effective internal reporting lines is an important safeguard. There is no indication these factors were at work in Kids Company, but it appears the trigger for the collapse was the purported use of Cabinet Office funds for a purpose not intended by the funding agreement. Given that some charities might find it more difficult to fundraise in a hostile environment, trustees need to look even more carefully at their reserve levels and their financial projections, and should be especially clear about any constraints that exist over the cash in the bank.
Not that cash in the bank always mean solvency. When trustees are thinking about reserves, they might want to reflect on how quickly the charity pays its debts. Research suggests that more than half of all small-to-medium enterprises wait more than 30 days for payments from those they supply. The latest SME Confidence Tracker report from Bibby Financial Services says 51 per cent of firms now wait more than 30 days, a rise of nine percentage points in the second quarter of 2015 on the same period last year. A small business commissioner will be created in future to name and shame late payers.
OSCR example accounts
Charities will soon turn their attention to the new financial reporting framework being introduced at the end of the year. The Office of the Scottish Charity Regulator has now produced some example accounts, like those prepared by the Charity Commission. They take a very imaginative view of the requirement for loads of comparative information. The examples can be found on the OSCR website.
Don Bawtree is lead partner for charities at accountants BDO LLP