A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support 6.2 Financial systems and record keeping When a well-established Welsh community organisation started converting grant-funded projects into trading activities it didn’t seem too important to adjust the accounts system in any radical way. There was already a fairly sophisticated computer package in place to analyse how each grant was spent so that reports could be prepared efficiently for funders. And the income and expenditure of each business was recorded carefully so that their progress could also be checked. After two years of impressive growth as the mix of trading and non-trading activities became increasingly complex, a financial report suddenly showed that the organisation had unexpectedly made losses of thousands of pounds over a period of a few months. This was traced to a member of staff who had been transferred to one of the new trading activities without the cost of their salary being charged against the business. An investigation revealed some important weaknesses in the financial system. • It was extremely difficult to report on the true financial position of each activity because there was no ‘costcentre’ arrangement (see below). It was not clear how much money they had started with, and separate departments or businesses did not make cross charges to one another for services or resources. • The quarterly reporting system, which worked well enough for grant-funded projects, allowed the loss to be passed off as a blip after three months and to become seriously damaging over six months; monthly reporting would have picked it up far earlier (see section 6.4). • Multifaceted organisations such as development trusts can be seriously at risk if an activity makes large losses which undermine the enterprise as a whole. The risk of damage can be reduced by setting up subsidiary companies to carry out new trading. 142
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support Overview of the finance system Introduction: Businesses run by charities and community groups are not so different from non-trading third sector activities that they need a completely different system for managing their finances. The basic elements are familiar and guidance is available elsewhere (eg the WCVA guide Faith and Hope don’t run charities – trustees do). But some aspects are distinct, and these are highlighted in the summary below. What does the organisation need? The following items aren’t optional. If you can’t provide the minimum on this list you may find it hard to manage effectively: • a bank account • secure procedures for handling and banking cash if applicable • procedures for processing and recording other incoming payments and for paying bills on time • payroll and PAYE systems • a cash book or computer programme for recording income and expenditure and monthly totals • a credit control system to handle outgoing invoices which are not paid at the point when they are issued • arrangements in charities carrying out non primary trading activities to separate the staff, assets and finances of the charity from those associated with trading • arrangements to separate the finances of parent companies and subsidiary companies • someone to keep the cash book up to date and to prepare financial reports • a realistic budget which shows you have sufficient income to cover expected spending • a monthly meeting of the people responsible for the finances – usually the board or a finance committee • the ‘Financial Report’ as an obligatory agenda item at that meeting • a written financial report available to all members in advance of the meetings where they are discussed. • a departmental analysis (also known as ‘cost centres’) if more than one different activity is carried out 143
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A guide to third sector trading - WCVA

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