Why keeping good financial records is important for non-profit organisations

Does your non-profit organisation (NPO) find managing financial records a challenge? If so, don’t despair – you’re not alone.

Recent research carried out by Sage Foundation and Charity Digital, in consultation with Solid Base Non-Profit Support, shows that only 38% of all staff involved in the finance function of UK NPOs have high confidence in performing financial tasks in all key areas.

The remaining 62% have varying levels of confidence with 11% having low confidence in all areas.

“Because nobody else will do it, [accounting] falls to me,” reported one of the survey participants, who founded an environmental organisation with less than £10k annual income. “Even though I’m often not sure what I’m doing!”

The research findings are partially explained by limited resources applied to the finance function, which is sometimes viewed as outside the critical mission of the NPO.

The consequences of an under-resourced finance function are often poor financial transparency and a lack of accountability. This can result in difficulties when applying for funding and lower success rates in acquiring funds.

This directly affects the sustainability of an NPO as well as its ability to serve its beneficiaries.

Boosting Organisational Financial Literacy at NPOs is therefore paramount – and this means having the tools, capacity and expertise to be able to manage an organisation’s finances.

In this article, we take a look at some of the basics, in the context of NPO accounting, to help you and your team improve your financial knowledge.

What are financial records?

Financial records track the flow of money coming into your organisation, and flowing out of it.

They might also list assets you have – everything from cash in the bank to buildings and vehicles.

Financial records might record the ways in which these increase or decrease in value (known as appreciation and depreciation).

When applied to a given financial period, the flow of money is called cash flow.

It’s good to keep the cash coming into an organisation higher than that flowing out of it. This is called a positive cash flow. This can lead to profit for an organisation.

And while no NPO is established to make a profit, it’s certainly healthy to aim for a positive rather than negative cash flow because that ensures there’s always money to cover liabilities – the regular outgoings you have.

Liabilities can be everything from staff wages to interest on loans.

The money coming in is known as income. And in an NPO, this can come from a variety of sources, such as donations, grants and legacies.

At the heart of your accounting will be the balance sheet. This shows the money that’s incoming and outgoing, and is therefore a statement of your financial position at any given time.

Why keeping financial records is important

The financial records that an NPO is likely to keep tend to fall into three broad categories. All of these will substantially overlap and share most if not all the financial information, but they have different functions.

Detailed accounting

The first is the detailed accounting you simply need to run the organisation on a day-to-day basis – tracking donations, for example, or tracking expenses when somebody purchases something.

This is where the balance sheet comes in, and it’s inherently detailed because otherwise you simply wouldn’t know how much money you have at a given moment.

This level of accounting enables everyday decision-making.

Compliance with legislation

The second kind of financial records are needed for compliance with legislation, such as tax laws.

If your organisation is registered for VAT, for example, you may need to record expenses in a certain way, then prepare a quarterly tax return for HMRC.

Additionally, invoices may need to have certain details on them, such as a VAT number.

Transparency and accountability

The third kind of financial records are unique to NPOs and revolve around transparency and accountability.

They aim to tell the story of the NPO’s work through a financial lens.

Producing regular financial documentation

While regular businesses might be overseen by a board of directors or partners, governance of an NPO typically takes the form of a group of trustees that oversees the work of the NPO to ensure it’s meeting the core objectives, operating within the law, maintaining optimum performance, and more.

However, they’re otherwise largely disconnected from the organisation on a day-to-day basis.

It’s for the trustees that you may need to produce regular financial documentation, such as the annual report, annual financial return, and annual set of accounts.

These will demonstrate the health of the NPO’s financial position, plus what the money is spent on. They’re likely to be available to the public too, to create demonstrable transparency.

The more money you receive via donations and subscriptions, the greater this unique requirement to keep and create financial records, due to government laws that govern NPOs.

Additionally, funding bodies may request proof that NPOs are doing the work they claim they are and will request this kind of data before handing out funding.

Applying for tax-exempt status certainly will.

This means financial record-keeping has a much more important role within most NPOs. It may require even more attention than private businesses, and often requires a different and more rigorous approach.

Avoiding over-reliance on spreadsheets

Sage’s research also shows there’s a huge reliance on the exclusive use of spreadsheets or paper-based accounting methods in charities and NPOs, comprising 39% of survey respondents.

While the majority of those in the world of business has long-since moved to accounting software, it’s clear that charities and NPOs lag behind.

The over-reliance on spreadsheets means there’s not the required visibility and accountability that’s mentioned above. Additionally, there’s not the visibility required to make better-informed decisions and take action.

Using spreadsheets for all of your accounting can mean those inside the charity or NPO – from volunteers, to employees, to trustees – feel like they’re standing on the outside, unable to get inside to the information they need.

There are three key issues that an over-reliance on spreadsheet accounting presents:

1. Disconnected processes

It’s difficult for you to understand how your income sources engage with you across different channels, or how beneficial they are to your business.

For example, this may happen when membership services have one view of a customer, campaigns marketing another view, and your volunteer manager yet another view.

Information is gathered and stored in silos, and processes around these are not connected.

2. Tied-up data

Spreadsheets mean data is tied up and isolated.

This means there’s no way to get the real-time, accurate insights that you need to respond to critical issues in your organisation that happen at any given moment, or to spot opportunities.

It can mean you’re constantly driving using only the rear-view mirror.

3. Costly, laborious processes

Put simply, the use of spreadsheets is not efficient. They’re idiosyncratic and unreliable, and often make sense only to the person who created them.

They’re inflexible and typically impossible to adapt for additional purposes. All of this means that labour costs massively increase when you rely on spreadsheets too much for your accounting.

Making use of accounting solutions for NPO finances

NPOs need to be run as if they are profit-led businesses in order to create the high-quality of record keeping and accountability that’s required.

To this end, successful NPOs need more than donations and funding to thrive. They need technological solutions that move their mission forward.

Technology is an amazing equaliser that means NPOs can achieve the same kind of efficiencies as even the biggest corporate.

Using the right integrated software can shave weeks off the reporting cycle, for example, freeing up much- needed resources such as budgets and staff time.

Good accounting software will offer:

• Live reporting on real-time results, enabling informed decisions and communication to internal and external stakeholders.
• Transparency and efficiency that accelerate fundraising by attracting more donors who are confident that their money is being managed responsibly.
• 100% of functionality available on mobile devices – providing real-time access anytime and anywhere.

And these are just some of the benefits of switching to an accounting solution:

• Better payments: Invoicing and collecting payments can be a nightmare. Consider using an automated invoice payments system or e-invoicing within your accounting software. This will help to improve cash flow and tackle the obstacles that stop your payments from arriving on time. And by making it easier for people to pay, you’ll save time on chasing payments.
• Use smart bank feeds and rules: Rather than spending hours manually entering receipt data into your software, use smart bank feeds and rules so you never have to enter a payment or receipt again. With automation, your bank transactions will securely flow into your accounts. All you need to do is confirm what you want to be posted. This will not only save you time, but having accurate data to hand will lead to accurate reporting.
• Link with your accountant: Good accounting software will let you seamlessly link in with your accountant so they can see your financial position – and be able to advise accordingly, or certainly take care of those regular tasks without the need for you to prepare in advance.
• Automate tasks: Automation improves accuracy and reduces the risk of error, especially when applied to financial tasks. Perhaps more importantly, it frees up those staff or volunteers who are doing the repetitive work. They save time that can be used elsewhere – which is vital for all charities and NPOs

Conclusion on managing financial records

Ensuring your NPO does as much as it can for those it serves is what drives you forward, and is topmost on your mind when you wake each morning.

And both identifying your admin headaches and reducing the back-office workload is a significant step forward in improving outcomes for everybody involved.

Getting on top of the financial reporting should be the primary administrative objective for any NPO. Intelligent and effective use of modern accounting software can, therefore, be transformative.

It reduces the admin workload by making back-office tasks easier and makes it seamless for governance and compliance to take place.

Donors and funders will be happier because you’re able to improve your relationship with them too.