Charity begins with sound accounts

Charity begins with sound accounts

The need for accountants to produce accurate and transparent reportsfor charities is greater now than ever before. John Hancock takes a look atthree of the largest and best-known charities in the country, the NationalTrust, the MS Society and the NSPCC, and investigates how they are meetingthe challenge

The National Trust (NT) is the best-known, largest and one of the oldest charities in its field. The full name, ‘The National Trust for the preservation of places of historic interest or natural beauty’, explains perfectly its mission. The charity has 245 properties open to the public, 241,500 hectares of land and 555 miles of coastline.

Chief accountant Paul Bailey explains: ‘One key driver is the need to monitor and control the cost of known conservation work required – #210m at the end of 1995/6.’ The Trust had u51m of restricted funds that year (#36m revenue, #15m capital) and u100m unrestricted (#20m revenue, #80m capital). Bailey adds: ‘Another key driver of the accounting process is the need to expose our funding requirements as an incentive to potential donors and grant holders.’

The #34m funding requirement, or gap between planned expenditure and expected income, was met from legacies of #20m, grants of #12m and the sales of leases and freeholds which earned #2m. Because of the age of the Trust and the permanence of many property-based projects, it is giving further thought to the categorisation of restricted and unrestricted funds.

Some projects include the original (and often restricted) gift plus top-up resources from the Trust’s unrestricted funds. The Trust is clarifying this whole area with the auditors Price Waterhouse in Bristol before agreeing a treatment with the Charity Commissioners.

Outputs divide broadly into projects (including purchases), a job bank (a ‘things to do’ list on a large scale) and routine expenditure (wages, running costs and so on). The money to cover them comes from a variety of sources, including rental income, investment income, proceeds from National Trust Enterprises (retail, catering, events), grants, legacies, turnstile receipts and membership fees. The accounting system – NT is a Raiser’s Edge user – has to match the outputs to the funding. It puts restricted donations to their designated projects – wherever possible using turnstile receipts to support the property which generated them – and allocates unrestricted funds.

‘It is particularly important,’ says Bailey, ‘to differentiate income from capital.’

Accounting for need

The Trust’s main purpose is the acquisition and maintenance of assets and it provides a good window into the management of charities’ money.

Two other organisations, the MS Society and the NSPCC, cope with a wider range of human needs, which can’t be measured in terms of square metres, maintenance schedules or inventories. They are typical of charities whose outputs are less easily quantified.

The MS Society deals with a physiological condition, multiple sclerosis.

The society operates a range of facilities and services, principal among them five care homes where sufferers and their families can take holidays in as near a normal manner as the condition will allow. These have a gross turnover of around #4m financed from various sources. Each home operates a booking system like any hotel, except that a bill may be split into a number of elements, with payment shared between local authorities, other care providers (often another charity), and the individuals themselves (where that may be practical). This leaves part to be met from the society’s own funds, to the tune of around u1.5m. The accounting system has to be able to identify each input and match it to each individual transaction.

Furthermore, the homes are equipped to a very high standard as hotels and therapy centres, including hydrotherapy pools and treatment rooms plus the specialist staff needed to operate such facilities.

Other projects include the installation of equipment into hospitals – such as the MRI scanners which are needed to detect and monitor the condition of MS sufferers. All of these activities must be identifiable in the accounts and their funding tracked back to source. The society also funds research, and provides a helpline and lobbying support for anyone dealing with health authorities and other bodies, as well as providing a range of information services for MS sufferers.

Given the pace of developments in the care and treatment of any condition like MS, it is usually better for the trustees to have the maximum discretion over the allocation of funds. ‘The skill’, says Geoff Miller, director of finance, ‘is to generate unrestricted funds but using specific examples to move donors.’

The MS Society runs its accounting on a Great Plains Dynamics windows-based system, installed to serve the charity as it stands today. It also uses Raiser’s Edge in the fund-raising part of the operation. The system categorises income by source, type (capital or revenue) and nature (restricted or unrestricted). It drives the ledger and then provides a breakdown of destinations and the appropriate trails from source to use. Miller adds: ‘We are pushing through activity-based budgeting so that we may be precise about where time and money have been spent, set goals and achieve demonstrable value for money.’

Protecting children

The NSPCC is also a charity dealing with an aspect of the human condition, although, in this case, one which is the result of other people’s actions.

The society exists to address the problems of abused children. ‘Activity’, explains finance director John Graham, ‘divides into three key areas: protection, treatment and prevention.’ Within those areas, there are a number of activities, services and financial functions which involve 120 projects and 1,400 employees. These include risk assessment, the post-trauma care of abused children, the running of playgroups for children at risk and the teaching of parenting skills.

For the NSPCC, the accounting process is driven by a requirement to evaluate the funding needs of each project team. This entails quantifying and placing a value on what the team needs to achieve in order to reach its project goals, and balancing this against the resources available in order to assess how the project will be funded. Of the charity’s u37.5m capital and #44.5m revenue last year, u1.5m and u6m respectively was restricted.

However, all ‘earmarked’ funds (mainly, although not exclusively, large donations) are treated as restricted, so that donors can see how their money has been used. Once again, Raiser’s Edge is the key system on the fund-raising side, while Masterpiece for Accounting from Computer Associates is the accounting software.

Some particular IT issues facing the NSPCC relate to the need for absolute confidentiality and it constantly updates to match the latest security systems. Currently, the society is working towards Ministry of Defence standards of encryption in the database which carries children’s records.

These three charities are examples of three key sectors: those dealing with assets only, those dealing with medical and physical conditions, and those dealing with breakdowns in the normal pattern of behaviour.

In many ways, the challenges of accounting in a charity are particularly great as many of the outputs are intangible and the revenue is only connected to the delivery side – that is, it must cover the demands of service delivery. This throws a greater onus on the accountant to create accurate and transparent reports and to establish trails from source to use so that the path and effective employment of funds can be clearly seen. Donors and others may well wish to look into the gift horse’s mouth, count his teeth and understand the purpose of each one.

John Hancock is a freelance journalist

The demand for accountability, both to donors and the recipients in whose name funds are raised, has brought huge changes to how charities operate. The Charities Acts 1992 and 1993 have fundamentally altered how they present financial information. However, new rules and regulations are only one of a number of considerations driving charities’ accounting processes. Unlike other organisations, charities’ income is not primarily or directly derived from the sale of goods or services. Those services they do deliver are a response not to market demand but to the needs of people most of whom are unable to pay.

Charities are not profit-making shareholder businesses (funding is usually gifted in some way) but the larger organisations have always needed to be able to identify and quantify money coming in, cost the programmes, assets and activities through which they discharge their charitable duties, and match the income and costs to highlight what fund-raising efforts will be required in the year ahead. In this process they have to lay a series of matrices to categorise capital and revenue, designate restricted and unrestricted funds, and value legacies which have been settled but not yet paid.

And beyond that, the management of fund-raising itself (many millions of pounds for larger charities) must be carefully monitored and recorded.

Different charities define their outputs in varying ways to suit the nature of their work.

At the beginning of the process, some 200 UK charities use a system designed for the fundraising by non-profit-making bodies: The Raiser’s Edge for Windows from Blackbaud Europe.

This software can manage donations by source of the income and by the purpose for which it is going to be used. It includes an integrated covenant and gift-aid administration capability which can produce relevant Inland Revenue tax forms and reports. Currently, Raiser’s Edge users have to employ other software to manage the rest of the accounting process but, in 1997, the company plans to launch a further development which will allow the management of fund accounting, including budget and project/grant management.

Charities analyse their outputs in a variety of ways depending on their objectives, but all have to work within a tax regime which, while broadly sympathetic, must balance their activities against those of more commercial enterprises.

In a number of areas, mainly retail and events, charities do not have free rein to take unfair advantage of their tax status to compete with profit-driven businesses. To work around this, most operate a trading company (some call them enterprise companies) to handle the retail, events and commercial activities which are required to raise funds, and then covenant their taxable profit at the end of the year to the charity. This then avoids the trading company’s liability for corporation tax.

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