The Secret FD: CFO influence lags behind in charity sector

I HAVE served happily for years as a trustee for a national charity, but the recent demise of Kids Company has shaken my fellow trustees, some of whom do little more than attend a mere eight meetings per year and worry about their personal reputations the rest of the time.

Many registered charities (such as accountancy institutes) are successful businesses operating under a charitable status umbrella – not in the simple sense of collecting donations and doing good work for worthy causes. In 2013 we saw the emergence of the charitable incorporated organisation which confers legal personality and limited liability features similar to those available to limited companies. Many other charities live a hand-to-mouth existence, and depend on unreliable income streams.
FDs of charities face a variety of issues. Most charity trustee boards have a treasurer – often an unpaid part-time overseer of all for which the FD is responsible. This is an archaic burden brought about by the nature of trusteeship, unnecessary where there is oversight in the form of finance and audit committees.

In this respect the charity sector lags behind others in encouraging the influence of the FD role to evolve, and this is a mistake given the constant financial pressures and reductions in many sources of funding.

Press comments about charities that fail due to a shortage of reserves miss one essential point on which any decent FD would focus. Charity reserves tend to be restricted and are not available for general use, such as propping up a central overhead bureaucracy, building the brand, providing a voice in the media or funding cost overruns. Raising funds achieves little if those funds must be used only for defined front-end services at zero profit margins. It is the availability of unrestricted funding and the build-up of reserves that hold the key to sustainability and to enabling emergency response activities for which there may be no specific funding. This involves maintaining separate records of income and expenditure streams. And ‘reserves’ are not ‘available cash resources’ to the FD, who must ensure financial sustainability in a challenging environment for working capital management.

Another challenge is to evaluate the economic model for the charity organisation where choices of projects to support are limited by the scarcity of resources. This is doubly difficult where the valuation of worthy projects is subjective but the costs are real, unpredictable and often unfunded. There is no standard approach to the manner in which loss-making projects are defined, costed and dealt with, and many charities must also account for the imputed cost of volunteers. Some charities operate statutory subsidiary companies, and this brings additional complexity.

The sector is rife with inefficiency, variability of quality, and competition not only for funding but to provide similar services. In an environment of compassion fatigue, some charities do not always behave in an endearing manner, and the recent moves to ban the bullying of donors are long overdue. Although many charismatic personalities are exemplary ambassadors, there are some who have associated themselves with charities as a cover for their misdemeanours, only to be exposed later, causing reputational damage.

The UK boasts nearly 200,000 charities with combined annual revenues of £65bn, but fragmentation calls for a consolidation solution, similar to that which is business as usual in the private sector. Legislation in 2006 made it simpler for charities to merge and some have done so. Looking at the successful organisations produced by charity mergers, I wonder why so many charities remain reluctant to merge and why some find themselves in distress at too late a stage.

The FD can take a lead by scanning the horizon for appropriate M&A opportunities, roping in pro bono advice from friendly accountants, bankers and lawyers, and devising appropriate acquisition constructs – commonplace in other sectors. ?

Last month the SFD holidayed in Barbados during the only week in eight years that it experienced earthquakes, and was otherwise moved by the subsequent media pleas for UK residents to open our doors to Syrian refugees