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 New procedures: People moving from non-trading third sector organisations may be unfamiliar with: • the separation of subsidiary companies • analysis by cost centre • credit control • the monitoring team • the format of the financial report itself (see Section 6.4). What will you be monitoring? Here are the main issues to watch for, in order of priority: • Have you got enough money to pay what you currently owe your staff, your suppliers, the HM Revenue and customs (PAYE deductions and VAT) • Do you have the resources you need to continue trading - ie to pay for your running costs, stock and materials in the coming weeks? • Where is future business going to come from - ie what orders have you got, what efforts are you making to attract or sustain new and existing business or funding? • Do people owe you money and are you making sufficient efforts to bring this money in? • Are you trading economically and profitably - ie are you paying out more or less than you are spending to operate the business? • Are you trading within your agreed budget? Income and expenditure records: Only the last two questions can be answered by the monthly income and expenditure records. The other items demand a monthly balance sheet. Keeping money separate Separate bank accounts? Many newcomers to social enterprise may feel instinctively that they will have more control over different aspects of what they do if they have separate bank accounts for each. This is usually a mistake. It could actually give them more complicated accounting work, and higher bank charges. The Charity Commission accepts that it is not even a requirement for parent charities and trading subsidiaries to have separate accounts – although arrangements for separate financial records are a legal necessity. You can normally do all the separating you need with a good analysis system. The need to analyse: Anyone who has any experience of financial records will recognise the principle of analysing income and expenditure under different headings – salaries, rent, stationery etc – although it may not always be obvious why this is necessary. 144
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 Some of the reasons for doing so are: • comparing different types of income and expenditure against budget forecasts to monitor progress and maintain financial controls • providing information to funders on the way their grants are used • separating the activities of different companies, including parent charities and their trading subsidiaries, for legal purposes • tracking the performance of different trading activities • identifying items which are treated separately by accountants for tax purposes • calculating the profitability of trading ventures, returns on investments etc. Analysing different income sources: • Meeting the demands of funders: One important type of analysis is already familiar to non-trading voluntary organisations. This is the frustrating need to make separate reports to a variety of different funders on the way their money is being spent. So you may have already discovered that keeping track of each grant can be a nightmare unless you have a robust financial record keeping system. • Analyse as you go: The only way to do this efficiently is to analyse your expenditure as you go along according to who is funding it. Otherwise you need to go back to your records and carry out a new analysis every time a report is due. The same approach is also vital to monitoring income and expenditure when there is more than one source of trading income or a mix of trading and non-trading activity. Charities and trading subsidiaries: It is a fundamental requirement of charity law that the resources of a charity are only used to pursue the objects of the charity. So it is unacceptable for the subsidiary company which is engaged in non primary purpose trading (see section 4.3 for definitions of types of trading) to benefit from the staff, premises or facilities or financial assets of its parent charity. The charity can rent or loan its assets to its subsidiary at a fair market rate. But this means it is necessary to keep careful records of: • any time which the charity’s staff spend working for a subsidiary, and the equivalent value of their wages and salaries • the proportion of the charity’s buildings occupied by the subsidiary and its rental value • a subsidiary’s share of use of office and other equipment owned by the charity and its rental value 145
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