Tracey Moore from UHY emphasises the importance of going concern information for charities. She explains how budgets and cashflow forecasts can be used as management tools beyond audit purposes. By regularly updating and analysing this information, charities can make informed decisions, improve financial planning, and strengthen their relationships with grant providers.
During the course of your charity’s audit or independent examination, you will prepare a substantial amount of information to support the underlying numbers in your accounts or trial balance. Central to this process is the going concern basis, which is the assumption that your charity will continue in operation for at least 12 months from the date that the statutory accounts are signed.
As auditors and independent examiners, we have a responsibility to consider management’s assessment of going concern. This entails examining various sources of information prepared in support of the going concern assumption.
What is required for audit purposes?
The main sources of information typically prepared to support the going concern assumption include:
- Budgets
Budgets summarise the income the charity expects to receive and expenditure it expects to incur. Like many other organisations, charities typically prepare budgets for each financial year. The majority of organisations will compare their actuals against budgets on a monthly basis. Most also forecast the anticipated year end position based on the actual year to date data and what is anticipated per the budget for the rest of the year.
- Cashflow forecasts
Although some charities can overlook cashflow forecasts unless liquidity is tight they are, in fact, a very useful tool regardless of the amount of cash you have in the bank. Cashflow forecasts consider what the cash position is, per the bank account, at a point in time – usually the beginning of the month. The forecast anticipates the income and expenditure for the month in a more detailed fashion than a budget, projecting the likely month end bank position. This process will usually be repeated for a number of months.
While most management teams typically prepare budgets and cashflow forecasts up to the end of their financial year, it’s important to note that, during an audit, we are obligated to consider information extending at least 12 months following the expected approval date of the statutory accounts. If your cashflow forecast only extends to the end of the financial year, we will request you extend the forecast up to our required period.
Turning auditor’s requests into useful management information
Given the work that is put into extending budgets and cashflow forecasts for audit purposes, we recommend a change in mindset. Rather than regarding budgets and cashflow forecasts as static compliance tasks, we encourage viewing them as ongoing tools offering live management information that is continuously updated throughout the year.
This can be taken even further, by linking your budget and cashflow forecasts with your charity’s strategy and reserves policy. You do, however, need to be mindful that forecasts become less reliable the further into the future we look. This is where documenting the detailed assumptions made as part of these forecasts comes into play.
The implications for grant funding applications
Maintaining up-to-date information is particularly beneficial when applying for grant funding from trusts and foundations. Most trusts and foundations incorporate provisions into their terms and conditions for multi-year grant commitments, stipulating that funding tranches will only be released when they are satisfied with the utilisation of previous instalments. Typically, an update on project progress, along with copy of the most recently approved statutory accounts, will be required.
Given there could be a considerable time-lag between the financial information presented in the accounts and the current date at which it is being evaluated for grant funding, it would be prudent for grant-giving charities to also request an update on the recipient’s current financial position. This is to ensure that the monies being released will have the impact intended, rather than being used to plug a hole in the recipient’s finances.
If the recipient charity has been focusing on turning its going concern information into a live management tool, it will be in a position to provide the grant provider with the requested information in a timely manner, minimising any time delay in the release of the next tranche of monies – which of course helps cashflow.
Cash and good liquidity are key to any organisation’s going concern and taking steps to enhance these can significantly bolster operational stability. However, the areas of focus will differ depending on whether you are a grant provider or a recipient. Looking at each in turn, we have outlined some of the key areas that merit attention.
My charity relies on grant funding – what should I consider?
Budgets:
Keep them rolling – most management teams are good at comparing their actual figures against budget on a monthly basis and will usually investigate any significant variances against the budget at the same time. This is the perfect point to simply extend your budget by an additional month.
Flex them – when we ask management to prepare budgets and cashflows, one of the key concerns usually holding management back is that the future is unknown. This is fine and it is actually a good thing to prepare various budgets based on different outcomes.
For example, if you have a number of income contracts that are due for renewal, it would be a good idea to have budgets based on what would happen if they were all renewed, none were renewed and some were renewed. Likewise for expenditure, you could budget for the impact that different percentage increases in staff costs would have, including the impact on employer’s national insurance and employer’s pension contributions.
The key here is to document assumptions made in the budget, so it is clear what impact any changes could have. Equally, if something happens during the year that completely changes your planned budget, don’t be afraid to re-forecast.
As auditors, we frequently stress test the budgets prepared by management as part of our assessment of going concern. Don’t be afraid to confront scenarios you hope won’t happen. With proper planning and scenario analysis, even if the worst happens, you will be in a much better position to spot issues early and make a plan!
Compare actuals to budgets — continue to compare actuals against your budget so that you can investigate any significant variances and ascertain why they have occurred. This should be done on a month-by-month basis and also at the end of the financial year. This will allow you to reflect on whether the assumptions used in your budget were accurate and allow you to make your budgets more reliable and meaningful going forward.
Keep people accountable — budgets aren’t just for the finance department. All key members of the management team should be accountable for what is in the budget. It is important to involve everyone at all stages of the process, from formulating the budget in the first place to providing ongoing input on their ability to deliver on their responsibilities outlined in the budget.
Cashflow forecasts:
Don’t be concerned about it being perfect — if you don’t know exactly when your income and expenditure is coming in, that’s ok. Forecasts are just that. They can be updated when you have more accurate information.
Update regularly — just like the budget, the key is to update information on a regular basis to ensure its accuracy. This applies to not only the expected timing of the income and expenditure, but also the monthly bank balance. If your starting position for each month is not correct, this renders the information useless.
Document assumptions — follow the same principle as your budget and document your assumptions made in preparing the forecasts. Again, flex them for different scenarios, such as the impact in a delay in income being received.
Budgets and cashflow forecasts not only help a charity’s financial resilience in planning ahead, but they can also be a useful tool to build an accurate picture of expected support costs for future grant applications, rather than basing assumptions on historical information which is already out of date.
My charity is a grant giver – what should I consider?
Implications of non-charitable expenditure — all charities need to comply with the public benefit requirement and ensure their expenditure is applied in pursuit of charitable activities. A charity which incurs non-charitable expenditure will, in most cases, lose its tax exemption on an equivalent amount of its income or gains which would otherwise have been eligible for tax exemption. Although rare, this can capture different types of non-charitable expenditure, including fraudulent payments.
As a grant giver, you have a responsibility under the public benefit requirement of the Charities Act 2011 and the tax exemptions afforded to charities by HMRC to ensure that expenditure is applied for charitable purposes.
Exercise due diligence — exercising due diligence in assessing the financial position of beneficiaries is crucial. As well as asking for an update on how the project being funded is progressing, it would be good financial due diligence to ask questions around the current financial position of the charity you are funding, which can include asking for up-to-date management accounts and budgets and cashflow forecasts.
- Do ask questions on the financial information provided — particularly if certain aspects are unclear or the assumptions used don’t appear to make sense.
- Don’t solely depend on the last set of audited or independently examined accounts. Charities have nine months to file their accounts with Companies House (if they are a charitable company) or ten months to file their statutory accounts with the Charity Commission if they are a Charitable Incorporated Organisation (CIO) or unincorporated charity. If there is a large time-lag between the financial information presented in the accounts and the current date at which it is being considered, anything could have happened in the interim.
- Don’t feel obligated to release funds to a beneficiary simply because you have made a commitment to do so. There may be instances where it’s necessary to make a difficult decision to either delay or withhold a tranche instalment if you feel that the beneficiary is not in a stable financial position. Practicing good stewardship entails making responsible choices even in challenging circumstances.
This could mean that you simply delay the next instalment until your concerns over the beneficiary’s going concern position is alleviated. However, if you decide to rescind all future funding, check the terms and conditions in the grant agreement give you the option to do so as you don’t want to end up in unnecessary litigation.
Informed decision making
Utilising tools such as budgets and cash flow forecasts as dynamic management instruments rather than static documents can provide valuable insights into the financial health of your charity. Additionally, maintaining up-to-date information and documenting assumptions ensures transparency and facilitates informed decision-making.