The recipe for good financial governance

An effective charity is a well governed charity. In this blog we look at some of the challenges around good financial governance, the ingredients of effective financial governance and tips on better engaging trustees with the finances.

According to the Charity Code of Governance1, a charity is best placed to achieve its ambitions and aims if it has effective governance and the right leadership structures. Skilled and capable trustees will help a charity attract resources and put them to best use.

Good governance enables and supports a charity’s compliance with relevant legislation and regulation. It also promotes attitudes and a culture where everything works towards fulfilling the charity’s purpose. The Code aims to help charities and their trustees develop these high standards of governance.

Challenges to effective financial governance

One of the biggest governance challenges for charity finance managers is that trustees don’t tend to join a charity board because they want to get involved in financial management, but because they are passionate about the organisation.

This means that unless they were recruited for their financial skills, they may not feel confident about finance and can’t be expected to have a deep level of financial understanding.

Whilst trustees understand they have a collective responsibility for finance, they can be over reliant on others with more experience to take the lead and they may also engage in finance at the wrong level. Effective financial governance means looking at the bigger picture and longer-term sustainability, rather than the smaller day to day financial details.
Also, it’s also worth remembering that trustees can be risk averse when it comes to managing public money, so can have an over cautious attitude which the finance / management team could find frustrating.

One recommendation for improving engagement, is for finance managers to remember when presenting financial information, not all trustees will be able to interpret a set of accounts and what it means to the organisation, so they will need to be ready to interpret them and think of creative ways of presenting and sharing financial information.

Achieving good governance

Another way to bolster their financial knowledge and understanding is to help them understand the drivers of financial success and how the charity generates its income.

Also, ensure the board has oversight of expenditure, income, assets, and liabilities. Having the right systems, reporting tools, controls, policies, and procedures in place is essential and these need to be reviewed regularly to ensure they are fit for purpose.

Keep trustees updated on the charity’s position on results, cash, and reserves throughout the year. There can be a risk that there is a focus on reporting just around budget time but for effective governance it’s important trustees are up to date on all three areas throughout the year.

Having finances on the agenda at every board meeting is a good idea, rather than only talking about the finances at the end of the year.

It’s also important to think about where to focus the most time. This will depend on the board’s level of engagement with finances and how confident they may or may not be, as well the charity’s financial performance.

Tips for getting the board engaged and confident in finance

Here are some other suggestions on how the finance/management team can get the board more engaged with the finances.

  • Offer a full induction/training at the offset to give trustees confidence in their role
  • Create a safe space where trustees can ask questions and be able to feel they can say if they don’t understand something
  • Give reassurance about what their collective role is at regular times as a reminder
  • Get the balance right by creating sub-committees to support the board, if appropriate
  • Ensure the trustees understand the key drivers for financial success and therefore what they should be monitoring
  • Help the board understand that finance is a means to an end and link to what is being delivered / impact of the numbers they are seeing on the organisation to really engage trustees in the finances
  • “So what?” – explain the figures and give a narrative to what is being presented and what engagement you need from the board, so they understand what is needed
  • Use outside advisors to offer additional reassurance/advice to the board, if appropriate
  • Consider more formal approaches to additional assurance, for example in larger organisations an internal audit function can provide this

To find out more, including how the finance team can lead a review to improve their governance using the Charity Code of Governance Code you can catch up on our webinar here.