In a recent report published by the Charity Commission, 76 charities with an annual income of at least £500,000 were identified as having peculiarly high governance costs, accounting for more than 20 per cent of their annual budgets. Governance costs refer to the expenses related to the day-to-day operations of a charity. Generally, these costs comprise only a small fraction of a charity’s expenditure—usually around 4 per cent—with the majority spent on charitable activities and the cost of fundraising.
The majority of these charities were associating governance costs with general management and administration costs—such as expenses related to staff, office, depreciation and support. There are two potential explanations for this:
- The charity was unaware of the Statement of Recommended Practice’s requirements for reporting its expenditure in the Statement of Financial Activities.
- The charity did not understand the difference between support costs and governance costs.
Either explanation illustrates a more concerning issue—that the charity has a poor understanding of how to properly organise its finances. The simple solution is to educate the charity’s trustees on following proper processes—such as the Statement of Recommended Practice, which gives charities guidance on financial accounting and reporting.
The Charity Commission emphasises the importance of trustees possessing a thorough understanding of their charities’ activities and expenses. Clean, error-free record-keeping is essential to ensuring that a charity is on solid financial footing as well as presenting an accurate, transparent view of its finances to the public.
For more information on how to comply with the Statement of Recommended Practice, visit www.charitysorp.org.