New guidance helps charities tackle misconceptions
Myths and misconceptions have long plagued the charity sector. In an attempt to set the record straight, the Institute of Chartered Accountants in England and Wales (ICAEW) has published a new guide, Dispelling Common Myths About Charities.
The comprehensive document explores ten myths relating to how charities are run, how they carry out their work, how they’re funded and staffed, and whether they’re liable for tax (among other issues) and offers practical advice to help charities tackle them and educate donors.
Here’s a rundown of the myths and the ICAWE’s recommendations:
1. Charities spend too much money on fundraising
Recommendation: “Developing and explaining a fundraising strategy to justify expenditure will show how the charity expects to fund its work. Trustees and senior managers should think clearly about what level of investment will be needed and where it will come from.”
2. Charities should not make a surplus or build up cash reserves
Recommendation: “Charities should ensure their reserves policy is easy to understand and linked to their strategic plan and risk management strategy. Far too frequently, more focus is placed on budgeted income, future income streams and the surplus or deficit for a single year. Reserves end up being considered only once a year when the reserves policy is reviewed as part of preparing the statutory financial statements. In addition, liquidity and treasury management needs to go hand in hand with the reserves policy.”
3. Charities spend too much on high paid executives
Recommendation: “Charities can ensure executive pay is proportionate by benchmarking remuneration against similar roles in organisations that are comparable in size, sector, and location.
“Disclosures relating to remuneration and other benefits including expenses paid to trustees are required by charity accounting and reporting rules. Charities should therefore aim to explain their remuneration policies and senior management pay in the context of the executives’ responsibilities to maintain public confidence in their work.”
4. Charities should not undertake commercial activities
Recommendation: “Charities often introduce commercial activities to diversify their income streams and avoid becoming too reliant on grants and donations. When charities decide to trade, trustees and management should consider whether a trading sbsidiary is required and how they will use it. The charity should develop a business plan and assess the demand for their proposed goods and services. Trustees must consider the viability and sustainability of the subsidiary’s business model and the set-up costs before they decide on the investment.”
5. Charities should run and be staffed by volunteers
Recommendation: While volunteers are the backbone of charities such as the RNLI, and the Samaritans, even these charities are not able to operate without full-time staff.
“Charities should have a clear strategy where resources should be spent – how many staff to employ, the number of volunteers that will need to be recruited and trained, or a combination of both.”
6. Charities spend too much on overheads
Recommendation: Charities should have a clear grasp of their administration and other related costs, and the impact they’re having on efficiency, impact, transparency, governance, and leadership. This can help trustees identify where savings can be made/further investment is required.
7. Charities don’t have to pay taxes so need less money
Recommendation: Charities should understand (and be able to explain) their tax situation in terms of the contributions they make, and the tax reliefs and exemptions they’ve been granted.
“They should regularly review their tax strategy to ensure they’re claiming the relevant tax reliefs so they can maximise the funds available for their work.”
8. You need professional qualifications to become a charity trustee
Recommendation: While professional qualifications aren’t essential to trustee boards, diversity is.
Trustees should identify imbalances or gaps in trustees’ backgrounds and perspectives and think creatively to fill the gaps, for example by inviting service users and people with relevant lived experience to become trustees.
9. Charities are less vulnerable to fraud than other organisations
Recommendation: “Trustees need to recognise their charities can be vulnerable to fraud and develop an effective culture of prevention. Every dimension of fighting fraud – deterrence, detection, and response – requires an effective anti-fraud culture at its foundation.
Trustees should ensure proper internal financial and data controls are in place and that both their design and operation are regularly reviewed, and new controls implemented where necessary.”
10. Charities should not engage in campaigning and political activity
Recommendation: Charities have a long history of campaigning and political activity.
The issues tackled by charities, such as poverty, often require legal or structural changes that can best be influenced by campaigning activities.
“When charities decide to engage in political activity, they should ensure that they act within the charity’s governing document and in the charity’s best interest, weighing up the potential risks or benefits of speaking up – or not speaking up - on political issues relating to their cause.”
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