Keeping account: A guide to charity financial analysis

We understand the challenges organisations face in getting the full costs of services, controlling cash flow, measuring performance, and managing and paying for staff and volunteers. But without proper allocation of resources, a charity’s various activities will not operate well. This report helps readers to understand a charity’s financial position and the risks it encounters in the face of certain challenges.

Why financial analysis matters

Charities confront a hostile financial environment, with many facing increasing difficulty in bridging the gap between rising demand for their services and falling income levels. With charity expenditure perennially under the spotlight, concern over administration costs and chief executive salaries are adding to pressure. Against this background, grasping the difference between different types of revenue, and understanding balance sheets and  financial risk has never been more important.

In this report, we think about how charities should manage themselves and spend their resources, addressing issues such as:

  • fluctuations in statutory income in a time of government cuts and changes in commissioning processes;
  • difficulties of increasing voluntary donations generally and income from major donors in particular;
  • the rise of new types of income: social investment and other forms of loan;
  • whether levels of spending by charities on administration and fundraising matter;
  • what level of reserves charities should ideally hold—especially in a period of slow growth;
  • governance and the importance of constructive board involvement.

The purpose of this report

This report articulates how NPC analyses the financial aspect of charities, and offers thoughts on where we think ratios and so forth should lie. It addresses in more detail the financial issues set out in NPC’s The little blue book, asking the following key questions:

  1. Is the charity financially sound?
  2. Are there good processes for financial management?
  3. Are financial resources used efficiently?
  4. What are the unit costs of activities?

The report looks at each question in turn, including unit costs within the section on using resources efficiently. It explains how to look for answers in the accounts and calculate key ratios, and also consider risks. Throughout the report we will reference the current audited accounts of Place2Be to explain terms and calculations.