The narrative – The Trustees Report starts with a message from the chair, and sometimes one from the CEO too, it then usually states the charity’s reason for being, often including its vision, mission and strategic objectives. The report then gives statistics and commentary on how the charity has delivered against those objectives in the year, both financially and operationally. This section should also provide details on governance, risk and reserves.

The shape of this narrative can vary hugely across the sector and it is clear that some charities view the annual report as a statutory reporting requirement to comply with, while others see it as a marketing document that offers an opportunity to tell their stakeholders what difference the charity has made in the previous year and what its future plans are, as well as recognising the contribution of its staff, volunteers and supporters.

When trusts review this report with a critical eye, they are asking questions such as:
• Does the charity have a clear vision and mission?
• Does it have clear objectives in line with its vision and mission / is there a clear strategy in place?
• What progress has been made against these objectives and how has progress/success been measured?
• Have the activities been appropriate to meeting the objectives?
• Are activities targeted in a specialist area or are they more diverse?
• What difference does the charity make? How do we know i.e. is it implicit or is there evidence to demonstrate outcomes?
• What are their future plans – long term and/or next year’s targets?
• What is their opinion on the year’s financial performance, how did it compare to the forecast figures and what are their plans/expectations for next year?

I would argue that the most important question here, for any stakeholder, is ‘what difference does the charity make?’ and yet this is often the question that is most overlooked.

While the larger charities with more fundraising and marketing capacity have focussed on including ‘impact measurement’ within their annual reports for some years now, many smaller charities tend to focus on reporting against objectives in terms of activities and outputs rather than outcomes and impact.

How charities measure and evidence the difference they make is a huge question, which has sparked much debate, so I’m not getting into that here but I think the key is to remember that this is the most important question to stakeholders (including a charity’s own management you would hope) and so should be a key element of the report. This could mean including more case studies, quotes and photos to share the stories of your beneficiaries as well as any hard evidence collected on your outputs and outcomes.

Governance and risk – it is helpful to include some information on how the charity is governed, how trustees are appointed, what training and support they receive and how they oversee the running of the charity including comment on risk management. Providing transparency on how the board operates helps to answer the question of whether the charity is well run, accountable and manages risk appropriately.

Reserves policy – one aspect of risk management that charitable trusts pay particular attention to is the reserves policy. This is the level of unrestricted funds that the trustees have decided should be held in reserve and is often described in terms of the number of months of operating costs that it would cover i.e. if all income sources ended, how long could the charity continue to operate. The report should show the target level of reserves and actual level at the end of the year. Charitable trusts will look at this figure and ask whether a) there is any risk to the charity as an ongoing concern due to a low level of reserves that have not been sufficiently explained and b) conversely, does the charity have an excessive level of reserves? If there is a high level of reserves, trusts will often take the view that the charity does not need their grant funding as it can fund its costs from its own funds. The question of how much is just right in the view of trusts and other supporters does not have a clear answer. The charity commission does not offer any guidance on the level of reserves that charities should adopt. However, we know anecdotally and through the criteria and exclusions policies of some trusts that amounts greater than 12 months of expenditure is considered to be too high by many trusts. The reality is that what is required from one charity to the next is much more complex than a set number of months and depends on variables such as the size and diversity of its income sources and the nature of its charitable activity.

Independent auditors report – this is the statement by the independent auditors to say how they have examined the accounts and that they believe the accounts give a true and fair view of the charity and meets requirements. Basically, you just want this to be the case as opposed to them ‘qualifying’ the accounts, which means there is information that they have doubts or disagreement with – this would clearly be a major red flag for potential supporters.

The numbers – Statement of Financial Activities includes the income and expenditure report, balance sheet, cash flow statement and the notes to the accounts. My view is that the more transparent the better when it comes to how these figures are presented. Any figures that stand out as being unusual or a cause for concern should be highlighted and explained in both the trustees annual report and the notes to the accounts.

I am not going to describe the financial requirements and definitions in any detail here as this is not a finance article and I am not an accountant. What I am concerned with is what potential supporters are going to question when they look at the accounts. Here are the key points that charitable trusts will look at when reviewing a charity’s annual accounts:

• What is the total income? Some trusts will exclude charities above a certain income limit if they prefer to support small charities or conversely below an income limit if they are seeking a larger impact than a micro charity could deliver.
• What is the surplus/deficit? Most trusts prefer to see a modest surplus as it suggests that the charity is being managed well by not making a loss and is spending most of the money raised rather than holding it in reserve.
• How do these figures compare to previous years? Consecutive deficits could indicate a problem in terms of the charity’s sustainability, whereas significant surpluses suggest a reduced need for external funds. Significant variances from year to year suggest a potentially increased level of risk to the charity and its activities.
• What is the breakdown of income? Trusts will be looking for a range of income sources to mitigate risk.
• What is the breakdown of expenditure and particularly what proportion is being spent on charitable activity, compared to fundraising and administration. Trusts generally look for as much as possible to be spent on charitable activity (as discussed last month in my article on 'the battle for funding core costs.'
• Does the balance sheet show signs of the charity having financial problems or excess cash? Trusts will be checking the level of liabilities compared to current assets and as discussed above will check the level of unrestricted funds (reserves) held by the charity. If unrestricted funds could be perceived as high, it helps to explain why in your reserves policy and/or to split the amount into general unrestricted funds or free reserves and designated funds. Designated funds are still unrestricted but the trustees have allocated them to a particular cost that is expected in the future, for example, building repairs or IT upgrades.