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 Making sense of the balance sheet Start here: The balance sheet is the single most important piece of financial information that most directors will encounter. If you are not familiar with balance sheets, you need to learn what they contain and how to interpret them. This section is intended for you. You should also refer to the model balance sheet for Anywhere Enterprises Ltd in Table 6.2. With the balance sheet you will get: • an overview of the organisation’s finances • a simple way to monitor change • the possibility of tracking different trading activities separately • the reassurance that most aspects of your financial recordkeeping are in good order • answers to questions which newcomers may not have thought of asking. Monitoring more than one trading activity: If your organisation has more than one trading activity your balance sheet reports may need to be adapted to show details for each of them separately in addition to the composite picture for the whole organisation. The combined information may be easier to compile and easier for directors to understand. But separate itemised figures for each business should be prepared regularly by finance officers, even if they are not always circulated to the full board. Knowing you’re in safe hands: The requirement that all this information is presented to the directors in writing at a set time every month (together with a system for the treasurer or finance committee to periodically check the accuracy of the information which is reported) provides the best evidence you can get of quality financial controls. • Simply receiving a full report implies that the accounts assistant, treasurer, manager, or whoever does the graft, has properly recorded all the month’s financial transactions, has banked the cheques and cash, paid bills, and extracted relevant information. • Depending on your organisation’s needs, the balance sheet may also include the outcomes of other key checks and procedures, including: − ensuring there are no hidden outstanding debts or spending shocks which have not yet reached the bank account − identifying who owes the business money, how much, and how old the debts are − bringing the PAYE payments up to date − maintain an ongoing VAT record − balancing the petty cash − carrying out a monthly stock check 156
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 − carrying out a bank reconciliation and identifying any accounting errors. That’s a lot of reassurance to get from a simple monthly report. Monthly comparisons: The balance sheet is excellent as a snap shot of your position at the end of each month. It can be even more useful for showing how things are changing over time when you compare balance figures over a number of months. Even if directors do not usually examine more than one month at a time, officers preparing reports for the board must learn to identify positive trends and danger signs, and be prepared to report them. Tracking your assets: Here’s what you should be aware of in the ‘assets’ section of the balance sheet. • A balanced view of the bank balance: Don’t automatically get excited by big current account balances or depressed by small ones. The amount of money in the bank is not necessarily an indication of the health of the business and it is desperately misunderstood by the directors and proprietors of small businesses everywhere. (If tomorrow you make last month’s PAYE payment or bank a big cheque for work which you did two months ago, your bank balance could go up or down by thousands of pounds. But your financial position will not changed by a single penny.) But you do need to be sure there is enough cash available if you have important payments to make. • Deposit account balance: This may include reserves set aside to cover potential redundancies or savings for equipment or future projects, and you may want this shown as ‘reserve funds’ to avoid giving a false impression to staff and volunteers. • Cash in hand: You don’t want to see large sums under the ‘cash in hand’ heading. This is usually cash payments you have received but not yet banked – which could represent a security risk. • Petty cash: For convenience this can be omitted if the amount you hold is small. But its inclusion can be a prompt for staff to carry out the monthly petty cash balance check. • Debtors: − This information should be available directly from your credit control records. − If the number of debtors is small it call be useful to itemise them on the balance sheet. − Directors should be alert to high or rising levels of customer credit, and to individual debts which continue in successive months. If these are getting out of hand your credit control system probably needs to be improved. 157
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