Charity financial report basics : know your balance sheet and cash flow
Originally published: July 2017 | Last reviewed: June 2018
Financial statements provide a picture of an organisation’s financial health, which is why your board of trustees, potential funders and charity regulator will want to see them.
All charities (whether registered with the Charity Commission or not) must prepare yearly accounts. Generally they will also produce more regular reports, usually on a monthly basis, so that management can keep a close eye on the financial health of the charity. These help track money coming in and out, and ensure that the organisation can meet its long term financial obligations.
The main reports that charities use are detailed below, along with confirmation of whether they are required as part of the annual submission to the Charity Commission.
Note: the information on this page refers to regulations in England and Wales. While the principles are similar in Scotland and Northern Ireland, charities in these jurisdictions should check with their regulator for specific requirements.
Also known as a trustees’ annual report, this yearly review of your work covers financial and non-financial information and should describe what your objectives are and how you achieve them. The level of detail and what you need to submit depends on various factors including your annual income and type of organisation.
All registered charities must produce an annual report and make this available to the public on request, while all those with gross income above £25,000 must also submit this along with the annual accounts to the Charity Commission, within 10 months of the end of their financial year. If your charity is a company, you must also submit your report to Companies House.
The GOV.UK site provides examples of these reports.
For more information, see Annual Reports: Essentials.
Many charities use their annual report to also communicate their impact in a more inviting way to appeal to a broader audience.
All registered charities with an income of more than £10,000 and all Charitable Incorporated Organisations must submit an annual return every year. This is submitted in the same timeframe as the annual report above, but requires you to verify the charity's structure and address, and to submit a simpler financial overview. This can be done online.
The annual return must be submitted to the Charity Commission (if you are registered in England and Wales) within 10 months of the end of your financial year. Charities registered in Scotland or Northern Ireland should submit to their regulators.
The information required for the annual return is mainly drawn (and summarised) from other financial reports including the statement of financial activities, balance sheet and cash flow statement.
Statement of financial activities
The equivalent of a profit and loss (P&L) statement in a for-profit business, the statement of financial activities (SoFA) details all income, gains, expenses and losses recognised for a particular reporting period, and analyses this by the type of activities carried out to show how resources have furthered the charitable aims. It also presents a breakdown of the change in the charity’s funds for that period.
All charities that prepare accounts on an accrual basis must prepare a SoFA for each reporting period and include this in their annual accounts.
The SoFA should analyse the key activities carried out. Activity lines should show the split between unrestricted and restricted income (and endowment funds, if relevant).
Income is split between:
- Donations and legacies (including grants which are not performance-related)
- Income from charitable activities: income earned from the supply of goods or services under contractual arrangements, and from performance-related grants
- Income from other trading activities: income earned from both trading activities and from fundraising events
- Investment income
Expenditure is shown by activity and will likely include:
- Costs of raising funds (e.g. fundraising and non-charitable trading activities)
- Charitable activities, split into key activities
Each activity expense will include direct costs and a proportion of the overheads/indirect costs. The notes to the accounts (see below) in the annual report must provide an analysis where relevant, for example, explaining the proportion of support costs allocated to a significant activity.
While all charities are encouraged to analyse their expenditure by activity in their annual accounts, only those above the statutory audit threshold (£1 million gross income) are required to do so. Charities under the threshold can analyse their income and expenditure using a different method.
Note that governance costs, such as audit, legal and trustee costs, are reported separately from charitable activities.
A balance sheet shows the position of your charity at a given date. As a snapshot of what the charity owns and owes at that point in time, it gives the reader a picture of the organisation's financial security and whether it has enough reserves to support itself in unforeseen circumstances.
- Assets: cash and cash equivalents, such as gift cards or certificates, grants receivable, or depreciable furnishings or equipment
- Liabilities: accounts payable, grants due to other organisations, or debts
- Charity funds, reserves or net assets, split between total unrestricted (including designated), endowment and restricted funds. Your net assets are those remaining after liabilities have been subtracted (or: assets minus liabilities = your net assets or charity funds)
The balance sheet must be included in the annual report. However, as best practice, it should also be produced as part of your regular management reporting (ideally monthly).
Statement of cash flows
The statement of cash flows provides a picture of the cash coming in and going out in a given period, whether it's a year, a quarter, a month, or generated on demand for a specific period. It shows how a charity uses its money throughout the year, and deals only with cash movements, therefore ignoring items such as debtors or creditors.
Cash flow management is an important aspect of financial stability, and a statement should ideally be produced regularly to see timings of cash requirements and to assess capacity to meet these. For example, a charity may receive regular grants for an activity, but if an installment is paid late, this can affect ability to meet project expenses or other ongoing costs such as salaries, rent or utilities.
The statement of cash flows typically includes up to three sections, depending on your sources of cash. For most nonprofits, this means net cash from:
- Operating activities, such as unrestricted funds raised from fundraising or income from operations that generate fees
- Investing activities, such as expenses or earnings from the purchase or sale of equipment or other long-term investments
- Financing activities, such as earnings from issuing or redeeming bonds
In the UK, smaller charities (with gross income less than £500,000) do not have to include this in their annual report. Those above the threshold are required to do so.
Notes to the accounts
These contain any further information not included in the above. They must include, among other items:
- Accounting policies
- Basis of allocation of overheads to activities
- Breakdown of prior year income and expenditure by unrestricted/restricted/endowment funds, if not shown on the statement of financial activities
- Trustee remuneration
- Breakdown of staff remuneration including total paid to key management personnel
- Any material uncertainties threatening the charity's ability to continue for 12 months after the report is signed
You may also choose to include details of relevant policies such as the reserves policy.
Templates and the new accounting rules
The official charity accounting standards (known as the SORP) have been going through a period of change and revision. Previously charities had to follow one of two SORPs: the SORP FRSSE for smaller entities, and the SORP FRS 102 for larger charities. For all reporting periods commencing from 1 January 2016, charities must adopt the SORP FRS102. If you are unsure how to apply the SORP to your charity, speak to your accountant or auditor for guidance.
To help ensure you meet all requirements, the Charity Commission provides templates and guides for those preparing accounts on a cash / receipts and payments basis and those preparing accounts on an accruals basis. (Read more about these two forms of accounting here).
This article was produced in partnership with Nishka Smith, a chartered management accountant and founder of the London-based Visual Finance Ltd., which supports charities to strengthen their financial management and planning capabilities.