Keep it legal: Hallmarks of an Effective Charity

The Charity Commission's updated guidance now includes a new hallmark of being "financially sound and prudent".

The six hallmarks are intended to help trustees to improve the effectiveness of charities. An effective charity needs to be clear about its purposes and direction, fit for purpose, learning and improving, financially sound and prudent, accountable and transparent and have a strong board.

Various examples of how charities can show they have the hallmarks are also set out. The guidance acknowledges that charities may choose or be obliged to follow other codes of practice, but it suggests trustees of such charities should still consider whether the hallmarks (or parts of them) could help strengthen the operation of their charities.

In order to show they are financially sound and prudent, charities need to have policies in place to manage their reserves, investments and borrowings. They should also incorporate financial planning into their operational and management planning.

Charities should ensure their financial performance is regularly reviewed. Income streams should be diversified and charities should have strategies in place to raise the funds they need to operate.

Fundraising strategies and activities should also be reviewed regularly so that they comply with good practice standards.

Any activities undertaken by a charity should also be structured in such a way that they are tax-efficient. In this regard, charities should be able to demonstrate that they are aware of the financial risks attached to any ventures they undertake, and that they have procedures in place to manage the risk of loss, waste and fraud from those ventures.

Legally, charities must prepare their annual reports and accounts in accordance with good practice requirements and file them within the requisite timescales.

- Anna West is a solicitor on the charities team at Coffin Mew

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