Funders need to look deeper than the headline figures when trying to understand the financial stability of a charity, according to a new report from NPC.
The think tank criticised the trend for judging charities based on how much income was spent on overheads.
Iona Joy, head of charity effectiveness at NPC and joint author of Keeping Account: A guide to charity financial analysis, said: “Overhead cost is not a predictor of what a charity can achieve so it is deeply frustrating that so many charities continue to promote low and apparently non-existent overheads in their fundraising.
“Efficiency is not about spending as little as possible on administration, fundraising or the salary of top management. Charities have to invest in these functions to be effective. What is important is that the money raised achieves impact.”
The report also warns that audited accounts, the annual accounts filed with the Charity Commission, are “an imperfect tool for reviewing a charity’s performance” as grants usually appear in the year they are received rather than the year the work is done. It suggests further discussion with the charity’s leadership team to get a fuller picture of the charity’s financial position.
NPC’s suggests a grading system in four key areas of financial management (financial security, quality of financial management, efficiency and unit costs and risk analysis) to help determine how well-run a charity is.
Joy said: “Grading a charity’s finances can help to articulate the risk of donating to the charity, as well as highlighting what it could do to improve its financial management or increase its sustainability.”
Rethink on reserves
The guide is an updated and expanded version of the finances section of the Little Blue Book, which was published in 2010, and uses case studies to explain how to read annual accounts.
In its latest guidance NPC says that: “We have re-thought our position on reserves.
“We used to say that three to six months of monthly expenses were sufficient to have in reserve for the efficient running of an organisation. Anything more was inefficient.
Now, "in a period of low growth, and depending on the charity’s activities and vulnerability of beneficiaries", NPC says: "a case can be made for more generous reserve-holding policies”.
