Topics – How to prevent financial mismanagement – Charity Digital News

Having a robust set of financial protocols in place can not only safeguard your organisation and its leaders – but can also help you to make operational efficiency a selling point for new donors. We offer a step-by-step guide to help
Charities run on trust. Without the trust of your service users, supporters, partners, and the wider community, your charity will struggle to function effectively and you will face a number of challenges when it comes to fundraising and service delivery.
This is why successful charities make efforts to operate transparently. By adhering to an open model, and disclosing as much operational information as is prudent, a charity can set themselves apart from their competitors.
Organisations that are transparent about how they spend money can make their efficiency a selling point. This principle is well established among corporate organisations looking to entice new shareholders. And it can be a great fit for charities that want to reach out to new donors.
One great example of this principle in action is charity:water. This leading aid charity takes a radical open-ledger approach to transparency. Its fundraising processes allow you to choose how your donation is used, offering a choice between donating towards field work or the essential back-office functions that make that work possible.
charity:water also track every penny donated to their cause and show donors evidence of the projects they helped to fund via photos and GPS co-ordinates. All of this helps to foster trust between the charity and its supporters.
On the other side of the coin, charities that cannot provide such transparency around their financial affairs will be far less appealing to prospective donors. Perhaps more worryingly, organisations that do not have well-defined and transparent financial processes in this place will find it almost impossible to combat claims of fraud or financial impropriety should they arise.
This kind of financial scandal can result in catastrophic reputational damage for both charities and charity leaders. That is why charities must have a robust set of financial processes and procedures in place: to protect the reputations of their leaders, and the bonds of trust between the charity and their supporters.
The first thing that you will need to do is to convince decision-makers within your charity (senior leadership, trustees, other stakeholders, etc.) that having the proper financial processes and procedures in place is important.
Focus on the key benefits, such as the added protection these processes will provide them, as well as the potential gains in fundraising. You can find a step-by-step guide to walk you through this process here.
You will need to secure buy-in for this project because initiating financial change within an organisation is a top-down process. Charity Financials’ guidance states that: “Trustees and senior management should lead by example and ‘set the tone from the top’ whereby internal financial controls are adhered to and the culture of control embedded in operations across the organisation.”
Charity Finance Group’s resources for trustees are very useful for educating senior leaders on the importance of sound financial protocols. You can find a guide to change management here.
The next step is to develop a financial infrastructure.
You will probably already have some kind of process in place. Start by reviewing your existing protocols.
Ask yourself whether they are secure, whether they are efficient, and whether they could be improved. Take note of any ad hoc processes that are being used so that you can develop a more formal procedure.
If process-owners seem resistant to change, be sure to stress the potential benefits of having a more robust process in place, focusing on how it could reduce risk to them.
The aim should be to create a sort of financial panopticon. No single person should assume sole responsibility for any process or transaction from beginning to end. All expenditures should be signed off by someone else and adequate records should be kept and reviewed at the year’s end.
The Charity Commission’s self-assessment checklist is a useful tool that can be used to assist you in building these processes.
This process of financial review and authorisation is most important when it comes to transactions authorised by trustees. All transactions conducted by one trustee (Trustee A) should be reviewed and authorised by another trustee (Trustee B).
It is important that these processes are not too arduous, as this will put people off and may lead to workers bending the rules to save time and effort.
In order to ensure that these processes operate effectively, you will need to monitor them continuously. There are several monitoring activities that you should consider.
The simplest of these is to check that processes are being followed. This will be increasingly important after the initial excitement of the project begins to wear off. If you are going to see the benefits of proper financial procedures, then you will need to ensure that policies are adhered to over an extended period of time.
One simple process that you will need to implement is bank reconciliation. This is a process by which you check your organisation’s bank account balance against your most recent statement. Any difference between the two figures must be reviewed and rectified. Think of this as an extension of existing processes of review and authorisation, but on a greater scale.
You should monitor financial performance against your budget. This will provide a greater degree of accountability and ensure that you are using supporter’s donations for their stated aims.
You should also consider establishing an internal audit committee to review your accounts at the end of the financial year. If your organisation lacks the skills or personnel to conduct such an audit, then you can hire an independent contractor to review your accounts.
Charity Financials’ ‘Auditor Spotlight Report’ provides details of the most reputable firms. You should also consider the difficulties of conducting such an audit remotely, and take steps to address them.
It is important to remember that, although this project will be a process of codification, any policies you do implement will ultimately evolve over time. This is especially true in today’s age of rapid technological advancement.
That’s why is important to regularly review the policies, processes, and procedures you put in place: to assess what is working, what isn’t working, and what could be working better.


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