Bookkeeping

Bookkeeping is sometimes considered as a lesser role than accountancy or perhaps its accountants who just think they are more important. Whichever way around it is the message to take away is that’s wrong.

Bookkeeping is the bedrock of accounts preparation and good reporting. It is very difficult to prepare accounts, reports or balance sheets if you have no information to put in them! Even if you have the smartest, slickest templates for your reports, without accurate, timely bookkeeping there is not much point in having templates at all.

The basics of good bookkeeping are actually very simple. You need to have an electronic system that allows you to easily enter dates, invoice numbers, descriptions etc. another essential tool for your electronic system is data manipulation. Most accounting software packages are specifically targeted at accounts which is perfect if all you want from your software is bookkeeping and reports.

We use excel spreadsheets for a couple of good reasons.

The first is its very cost effective, once you have bought the initial package you have that for as long as you need with no renewal costs (unless you are now on the pay monthly deal offered by Microsoft).

The second reason is just how adaptable excel really is. It can be used to store an unlimited amount of data whilst still providing the tools to quickly and easily dig out the information that you want. Excel is not just useful for finances, you can use it for monitoring numbers of people helped, website visits, contact details the list of uses is almost endless! Some more examples include monitoring key words on your website, monitoring training records and so on.

So, excel is our preferred software of choice for small charities. Once you reach a certain size however you will find specially made accounting software essential for quick bookkeeping. But remember size is not necessarily a measure of expenditure or income but a measure of how many transactions your charity needs to process.

Internal controls and procedures

Another essential tool for bookkeeping is a solid internal controls and procedures policy. There is more information on our website including guidance documents provided by the charity commission. But the key is make sure the procedures are reasonable and that the controls are effective. Internal controls and procedures is such a complex topic that I will dedicate another article to this at a later date.

So far we have only scratched the surface of bookkeeping but there is plenty of time to say everything that needs to be said! Stay tuned.

Creating an Ethical Culture

Over the last few years there has been a lean towards using ethical values and principles to govern professions in the light of financial crashes being caused be unethical behaviour. We are now starting to see the spot light turned on charities as recently there have been some bad examples of poor ethical behaviour.

One issue is people assume that because you are involved in a charity or work or run a charitable organisation that automatically makes you ethical to a certain degree. This is of course true in some cases but what charities lack in general is the organisation wide ethical approach to every aspect of work. As accountants we are taught to approach every client and business partner with a degree of professional scepticism. This is not because we never trust anyone or indeed that are clients and business partners are not trustworthy, it is simply to recognise that no matter how good we think we are at reading peoples character we are never going to know enough to be able to eliminate all doubt.

It’s not enough to just act ethically in one department. Your staff, your volunteers, your trustees and every one in-between need to think and act with a professional mindset. A great way to achieve this is to implement an ethics policy or code. The set of principles below are often referred to as the Nolan Principles or The Seven Principles of Public Life. Using them as the starting blocks to build your ethics policy is a good way to start.

Selflessness Holders of public office should act solely in terms of the public interest. They should not do so in order to gain financial or other benefits for themselves, their family or their friends.

Integrity Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might seek to influence them in the performance of their official duties.

Objectivity In carrying out public business, including making public appointments, awarding contracts, or recommending individuals for rewards and benefits, holders of public office should make choices on merit.

Accountability Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.

Openness Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands it.

Honesty Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.

Leadership Holders of public office should promote and support these principles by leadership and example.

Important things to note with implementing an Ethics Policy

-     1. Creating an ethical culture throughout your charity needs to start from the top and be reflected all the way down to volunteers to be effective.

-      2. Making sure all new volunteers and staff are taught to be ethical when they join your organisation is a great way of maintaining your organisations ethical values. 

-      3. Being aware of outside threats is key to ensuring your organisation does not accidentally behave unethically.

-      4. Constant reminders for all members are important as it is easy to get into bad habits.

-      5. Last but not least make sure you have clear objectives for implementing an ethics policy.

If you want any help or advice in creating an ethics policy that suits your organisation Chadmin is more than happy to help. As accountants we have ethical principles that we have to abide by and after a while it just becomes common sense. That is essentially the main goal of an ethics policy, to get everyone involved to naturally react in an ethical manor.

Materiality

Materiality is a strange accountancy calculation for many different reasons. The first reason is that it is often not calculated to an exact figure. By that I mean when you calculate materiality you will most likely round that figure to a nice whole number. This goes against the grain as 99.99% of the time our figures must be as accurate as humanly possible. Although even if it was calculated to an exact figure there is still the possibility of that figure being unrealistic or just wrong.

Another varying element with materiality is who decides what is material for this organisation? Just last week I was questioning KPMG Auditors over there decision to set materiality at 1.5% (of total expenditure) for West Devon Borough Council. During the conversation I discovered they have a maximum and a minimum percentage that they will apply for different organisations. The higher risk you are the lower percentage materiality they will use and vice versa. Interestingly they calculated materiality on expenditure instead of income which is different to the commercial world where you would normally calculate it on turnover.

This is all nice to know but how does this help charities or even small businesses? First we need to understand the concept. Materiality is really a tool to help prevent charities and businesses getting weighed down by insignificant errors in reporting on accounts. If there was not a similar mechanism in place entities would be endlessly making minor adjustments to accounts. Having a measure as to what is classified as a serious error helps auditors and accountants make reasonable decisions on the accuracy of the accounts.

Another side of materiality is that it acts as a safety net. By this I mean materiality is there to insure there is a limit on how big a mistake can go unadjusted. Remember lots of little mistakes or errors can add up to being material so it’s never worth ignoring items that are not considered material. Often auditors will raise adjustments that could be made but are not of a material nature and can be adjusted moving forwards. It is important to work well with auditors at the same time as not becoming too familiar.

As a charity it is important to make sure your materiality percentage makes sense but also gives you enough room to move freely. Setting it at anything below 0.5% is probably too low but above 4% is far too high. Other things you need to consider are what will you calculate materiality on? As a charity calculating it on turnover(income) may not be the best way as regularly charities spend more than they receive. You could of course have two separate materiality levels one for income and one for expenditure.

One last thing to say and that is once the level of materiality has been set for the year you must abide by that level. You cannot suddenly decide to increase your materiality level because of what you find.

The Office Move

Moving my accountancy and fundraising business has been one of the busiest weeks I have had in a long time. First thing on the Saturday morning I went to the van depot to pick up the hire van only to find out I had not held a driving licence long enough to be able to drive the van! At this point I was thinking to myself it’s going to be one of those days! I had to wake up my friend who was helping me move and get him to drive the van instead (I now owe him several pints!). Thankfully that was the only thing that went wrong that day. We got everything in to the office mostly without damaging it!

The odd dent in a desk or filling cabinet is not concerning and does not hinder me or my staff working. My new accountancy office however, does not currently have WiFi due to Talk Talk not behaving themselves. The Phone number is also incorrect again due to Talk Talk messing us around. Hopefully this will be resolved soon and I should probably apologise now for the poor person who has to deal with my formal complaint! Still you can’t expect everything to go correctly and despite this issue with the internet and phone everything has gone relatively smoothly. For anyone else looking to move office make sure you start setting up your phone line and internet at least 2 months in advance of the move! (as clearly 1 month was not long enough!)

After a week of trying to work without internet connection whilst also unpacking everything we finally feel like the office has fully been set up and ready to go. It’s been an interesting week moving the accountancy practice from my Parents loft to an office in the centre of Okehampton. Despite being very grateful my parents let me use their loft, I am very excited to have moved out and taken a big step forward. Instead of crammed files, piles of boxes and documents everywhere, I now have row upon row of neatly labelled files all my documents are in the filling cabinet and boxes are a thing of the past!

In general, I have never been the most organised person in fact that is probably my greatest weakness. Thankfully I am able to recognize this and have taken steps to ensure my fresh start is not short-lived due to my disorganized approach! Much of this new organized office is thanks to Emma who I have been working with over the last 6 months. Although I may have said what I have wanted Emma is the one who actually implements these new systems.

Fresh starts are never easy mainly because you realise how stuck in your ways you were. Turning over a new leaf often highlights all the flaws in your previous accomplishments which (although slightly depressing) highlights new ways to improve and better the old versions. I find this exciting for a new accountancy office as it means I can only improve (at least that’s the idea). I would actually be more concerned if I had no vision for the future improvements I would like to make.

Looking to the future for my accountancy firm I hope we become a leader in charity finance and governance on a national scale. This may seem a long way off but every step we take is a step closer to the goal. In achieving this goal I hope we make a difference to every charity client we have along the way. 

Charities, Accountants and Data Protection

More and more we are starting to see Hacking being used to steal our confidential information as opposed to the traditional ways. Big companies often find themselves more at risk despite having higher security than a sole trader would.  Yahoo is the latest news worthy victim losing millions of people’s login details and account information. (luckily I’m with google)

These disturbing stories can seem distant and unlikely to small charities and accountancy firms but the risks are very much still there. One of the easiest ways you can be hacked is through scam emails. All it takes is one click in a scam email and you can lose everything (or be ransomed with your own information!)

This raises the question of what happens when it comes to data protection and being hacked? Something, I would imagine, most large companies would have a policy on. Most small charities and even most small accountancy firms are unlikely to have a strong policy on issues like this. After all who is going to target such a small organisation?  

If you do not have a policy in place, think about these questions and then you may change your mind.

If there is no policy in place is it your fault for not taking the proper precautions?

If there has been no formal training is that again the fault of the organisation?

If you do not have virus protection on your computer are you being negligent?

Are you using an email account with a poor spam filter and if so would that mean you were to blame?

You could argue that it’s the fault of the Hacker and to a certain degree it is. However, if you as an organisation are not taking the correct precautions you are not being responsible with confidential information. Confidential information being lost can be financially damaging and mentally unsettling for employees and volunteers. Your responsibility as a data controller is to make sure you take every precaution with all confidential information.

Independent Examinations

One of the first independent examinations I did was for a very small charity in Devon. It was one of those unusual situations where the charity was only expected to go over the £25k threshold for this particular year. The reason was due to a large sum of money that had been left to the charity in a will. For this particular situation it made the Independent exceptionally easy.

Due to the small size of the charity there was hardly any documentation to go through. There was however a need to explain the reason for the sudden hike in income to the charity commission specifically noting that this was unlikely to happen again. (unfortunately from the charities perspective!) thinking about this situation is one of the reasons I enjoy independent examinations. You never know what you’re going to find around the corner at each different charity.

However, you do not always come across such happy circumstances when undertaking Independent examinations. In fact, the main reason for completing independent examinations and audits is not to identify when things are going well. Independent examinations are a tool to help you identify errors and fraud and prevent any biased opinions being present in the accounts.

In the example above I was able to trace each expenditure from the minutes through to the receipt. In general, though this will not actually be possible. Small charities (under the 25K threshold) are often at a point where the trustees can make a decision on every single item of expenditure. As charities grow they will have no choice but to delegate expenditure to employees or volunteers. (otherwise they would do nothing but authorising payments)

This is the point where charity accounts start to get more complicated and require outside review (independent examination) to ensure they are in compliance with accounting standards and charity regulation. This is also the point where internal controls become essential but we will save that for another day!

Restricted Funds – Use Wisely

Fund accounting, as it is commonly called, can be a very successful tool for raising money (or saving up) for a specific project or cause. The benefit from a member of the public's point of view is that they know where their hard earned cash is going to be spent. This does of course rely on how well your campaign emphasises the fact that the money they donate will only be spent on this specific project. People always like knowing where their money is going and more importantly they are more likely to hand it over with this knowledge readily available.

As mentioned above from a charities point of view having this tool is very useful but there are also a number of drawbacks. Once a restricted fund has been set up this money and any further money added to this restricted pot can only be used for the reason the restricted fund was set up. At this point you may be thinking well that’s good isn’t it? Well yes and no, it entirely depends what the fund has been set up to do.

Let’s use an example of a charity that provides sports and recreation for a town or local authority. If they were to set up a restricted fund to repair or replace all goal posts and nets any money set aside for this purpose will only be available for goal posts and nets.  A much better reserve to set up would be a maintenance, repair and replacement reserve for sports facilities. This reserve can include almost everything that you need to maintain any sporting facility you have. It could include your indoor courts, tennis courts, rugby equipment etc. The other option would be to set up a restricted fund for each single item you may need to replace or repair. Apart from being a huge administration pressure you will end up with pots of restricted funds that are unable to be used. In other words, there is no flexibility having to many different restricted funds set up.

Often large donations come with a catch i.e. you must set up a restricted reserve (only use the money for a particular activity) to accept the donation. This can be restricting to a charity especially if extensive effort has been expended to draw in this particular donation. Although it can be restricting, I would suggest continuing to work for these sorts of donations and keep encourage current donators. Providing the work you are expected to do falls within the scope of what your charitable aims are, you can find a way to make these donations work to your charities advantage. At least you are getting income even if it is restricted you are still making a difference. The more willing you are to work with people who make large donations the more likely they are to continue supporting you and over time you will be able to guide them to what you need the most.

The point I am trying to make is be wise with your restricted reserves. Use them to your advantage in fundraising campaigns. Be savvy with setting up the restricted funds in the first place and make sure they have a broad enough scope so they do not hold you back or leave pots of money stranded. 

Accountants VS Volunteers

This is the first blog of many to come from The Charity Accountant (Ben Stephens owner of Chadmin). There are many topics to cover from fund accounting to bookkeeping to independent examinations. I may also stray into topics such as fundraising and administration but everything on this blog will be focused on charities.  All these topics and more will be discussed overtime but for the first blog I want to talk about why so many charities still rely on volunteers for their accountancy needs.

1. The number one reason is of course it’s free which sounds perfect and makes charities feel like they are saving money.

The trouble with free accounting services or free bookkeeping is there is normally a lack of professional knowledge. This can regularly become more of a hindrance for charities than a benefit. Most accountants will always do their best to save money for their clients (charities or businesses) and this is something that a volunteer would not necessarily have the skills to do. Of course if your volunteer who does the accounts happens to be a qualified accountant then you are very lucky!

2. Accountants are often not trusted as we are occasionally perceived as money grubbing monsters!

This is true for some accounting firms who unfortunately care about money more than people. But there are plenty of practices around who genuinely care about making a difference to the world. They can be difficult to find but when you do find one that works well with your charity make sure you keep them. Whilst we are on the subject of charity accountants don’t forget to check out my website Chadmin For Charities.

3. The transition can be difficult going from volunteer to paid accountant.

If you have had a volunteer who has done the accounts for years but the charity has grown beyond their capabilities it can be difficult to say we need to get an accountant now. But it is very important that you do! Otherwise you could end up on the wrong side of the law simply by trying to keep costs low and not wanting to lose a committed volunteer.  If you are respectful of the work the volunteer has put in and include them in some other way, perhaps get them to work with the accountant, then you can have the best of both worlds.

4. Trustees think an accountant is not necessary.

This can happen easier than you might think. Trustees get used to the volunteer doing the accounts and as the charity grows and expands probably forget or do not realise that they are asking too much of their volunteer. Communication is essential between trustees and volunteers to ensure volunteers are not being given responsibilities they are not qualified for. Obviously in the first year or so of starting up your charity there is probably no need to be paying for an accountant. As you start to grow your accounts will inevitably get more complicated. (Keep reading my blogs to see what I mean by complicated!)

5. Worst case scenario is that the people running the charity think reporting and keeping accurate accounts is not necessary.

I personally have not come across any situations like this yet but there are bound to be people who think like this for one reason or another. Even if you hate all the endless amounts of reporting it is essential that you don’t ignore it or make it less of a priority. The reason reporting is so essential is to ensure charities are legitimate and not committing fraud or being used as fronts for organised crime. If your sat there thinking “well my charity is clearly legitimate” think on this. How are the Charity Commission or HMRC meant to prevent charities being used for fraud or fronts for organised crime without some kind of information exchange?  

Thanks for reading and stay tuned for the next topic I cover! I will be posting a new blog at least twice a week. Perhaps even more if there is something really exciting going on in the world of charity accountancy!