Advanced Civil Society Accounting

Published:

Introduction

Back Ground

North of England Training Trust (NETT) has been operating successfully as an unincorporated charity for 30 years running 7 equal sized workshops across the north of England working with disadvantaged young people who have failed to gain the most from the state education sector.

Statement of Financial Activities

Most of the charities work is funded through Service Level Agreements with the work programme in their region. 2013 saw an increase in funds of £1,466,144 from the year prior, giving a total income of £5,666,990.

A net profit of £76,447 was gained and the balance to carry forward at the year- end is £722,278. Given that the SLA’s will be contracts any surplus can go into unrestricted when the contract has ended, allowing the funds brought forwards from the previous year to be transferred into the unrestricted funds which will cover the governance costs.

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The information given on the financial statement says that full cost recovery is not applied within the SLA’s but is gained back through the surplus under-spend

NEET also have incoming resources from donations, gifts and fundraising events.

The charity has done some fundraising and has raised strong links with local organisations such as CBI and Chambers of Commerce.

The income from fundraising sources 3 people to research new ways of developing skills for disadvantaged young people.

The charity holds 8% of its current expenditure in reserves which would be equivalent to approximately 6 weeks running costs should the charity close. The lack of reserves could make the charity fiscally vulnerable and this would raise concerns with funders.

Current Position

The charity is an unincorporated association – whilst this is an ideal starting place for small groups with short term goals, this is not the case for NETT. The charity has been in existence for 30 years and carries a large amount of income and expenditure each year.

An unincorporated association leaves the charity wide open to a number of issues. In the position that NEETs are currently at, I would think that it would be incredibly difficult to secure alternative funding to sustain all of NEETs services. The trustees are personally liable for any debts or personal injury claims.

The treasurer is concerned about the charity’s long term stability, particularly with its reliance on statutory funding which is dangerous with the current funding climate. The treasurer is also cautious about relying on local employers, many of whom are just emerging from the recession.

The CEO want to increase its area of activity by opening up 3 more centres in the midlands – he believes that an increased level of activity is the best way for the charity to become more sustainable. Opening up 3 more centres would put NEET in a stronger position when tendering for services.

The head of fundraising has concerns that the charity is not maximising its income from corporate sources and also believes that participatory events such as long distance walks or cycle rides will enhance his income generation plus some face to face fundraising.

Historically the levels of statutory income apart from 2012 were above budget. Donations and gifts were actually lower than budget, but fundraising income had increased by 11% from the previous year.[1]

Overview

This document has been prepared following a meeting, in response to a request by the CEO to consider options open to the charity and advise the SMT and Hon Treasurer as to which offers the best return to the charity.

Business Strategy

The first issue would be to implement changes to the structure of the charity to give clear and sound accountability.

Recommendation to the board:

Change the structure to become a Social Enterprise, this will allow NEETS to charge for some of the training it provides to other businesses and charities. This will allow the charity to fulfil its social mission and reinvest the majority of their profits in doing social good.

The social enterprise achieves this by selling its products or services. The social enterprise coincides well with the activity the CEO has expressed an interest in, selling some of their services would enable the charity to become more sustainable thus allowing an increase in activity and permitting NEETs to open up 3 more centres in the midlands putting them in a stronger position when tendering for services.

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Again the social enterprise seems to resolve several issues and have all the answers, especially with the treasures concerns regarding its reliance on statutory funding and of local employers some of which are just emerging from the recession.

If NEETs assumed a more traditional company structure with a board of directors that are legally accountable for the charity’s social mission as well as its financial performance. This would give the charity the opportunity for growth.

Whilst accepting that turning the charity from a SLA dependent organisation into a sustainable business and still continuing to provide a service for young people will be a challenging one. The result of increasing the charity’s area of activity will increase occupancy, increase revenue and reduce costs.

A service will still be provided to disadvantaged young people and the business will bring in a mixed market of service users – which would be the majority of people accessing the service and will produce income to enable more disadvantaged young people free access to services provided.

Becoming a social enterprise will allow the charity to make money to invest back into the organisation and grow its social impact.

If changes are made to the structure of NEETs it would give the board management and staff the opportunity to learn from their findings and make significant improvements within the organisation. Hopefully making NEETs more transparent, accountable, efficient and effective, placing them in a stronger position when tendering for future funding.

The enterprise will help to maximise the income allowing the head of fundraising time to concentrate on other ways of gaining income. For example, applying to charitable trusts for grant funding, donations and legacy funding.

The charity has a proven track record of creating sustainable business models which will allow them to access finance through social enterprise.

A Social enterprise will:

  • Have a clear social and environmental mission set out in the governing documents
  • Generate the majority of its income via trade
  • Reinvest the majority of its profits
  • Be autonomous of state
  • Be majority controlled in the interests of social mission
  • Be accountable and transparent

Benefits of social enterprise

  • Greater Impact
  • Increased benefits for people businesses and communities
  • Increased reach to disadvantaged young people
  • Great critical mass: ability to reach and deliver beyond the North of England

More Resources

  • Attract more public funding where policy requires a proven need and evidence.
  • Merger with other training providers to provide a strengthened negotiating power

New and better ways of working

  • Innovation: new and more effective ways of doing things
  • New perspectives and challenges
  • Improved intelligence about needs and opportunities

Manage Risks

  • Complementary strengths within the organisation, resources and perspectives
  • Greater flexibility within the teams

Reduce costs

  • Share costs of common functions (in promoting and delivering services, in common systems use of internet.[2]

Options Paper for the Board of Directors

The following options are available for the board to discuss.

Option 1 – Maintain the Status Quo

After due consideration the board could decide that there is no need to make any changes to the structure or the governance arrangements of NEETs. The board could task the Chief Executive to find alternative funding from other sources. E.g. grants from charitable trusts.

Advantages of this option:

  • NEETs would only be accountable to Service level agreement bodies.
  • There would be no upheaval for staff and trustees to deal with in the short term.
  • No immediate difficult decisions to deal with.

Disadvantages of this option:

  • Assuming the current climate would make it difficult, if not impossible to secure alternative funding to sustain all NEETs services under their current structure
  • County wide funding bodies would commission other training projects providers to deliver projects across the North of England and Midlands giving a duplication for services.
  • There will ultimately be a reduction in services provided by NEETs, redundancies and even the end of NEETs
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Option 2 - Keep the same structure and implement some of the recommendations

Assuming that there is limited if any funding to make changes to the structure and provide training to staff, the board could choose to keep the structure the same and implement some of the recommendations that do not require any additional resources

Advantages of this option:

  • No expense
  • Limited disruption to staff
  • No immediate decisions to be made in relation to reduction in services etc.
  • Some improvement in efficiency and effectiveness

Disadvantages of this option:

  • There is still too much responsibility and pressure placed on the Chief Executive, meaning that the organisation cannot operate to its full potential.

Option 3 – implement all changes recommended in the report, including a new structure

The board could choose to make all changes as recommended.

Advantages of this option:

  • It would meet the requirement of external funding bodies and partner agencies.
  • It would hopefully mean that the organisation becomes much more efficient and effective with transparent operating procedures that can be seen by partner agencies and funding bodies
  • NEETs would be in a stronger position when tendering for future services.
  • The manager would be given direction and have more support from the trustees and staff
  • Staff and would be more supported and more involved with strategic planning and running of the organisation.

Disadvantages of this option:

  • There may be additional costs which could result in redundancies, cuts in hours or cuts to services to enable implementation of the new structure unless the cost can be met by reserves.
  • There would be a considerable amount of upheaval for staff and trustees to deal with.
  • Morale and service delivery could be affected while changes are being made. [lf1]
  • There could be more pressure and work placed on trustees, which could result in trustees leaving
  • There is a considerable amount of work needed to be done in order to implement the recommendations. Much of this work would fall to already stretched members of the organisation.

Recommendations

The board should discuss the options given above together with the proposed action plan, alternative structures charts and costs and provide direction and support for the Chief Executive. Tasks should be assigned and timescales agreed.

Assuming the board go with option 3 the following page outlines a provisional 5 point Action for the existing board of trustees could implement.

Action plan

RECOMMENDATION

PROPOSED ACTIONS

ANTICIPATED OUTCOME

LEAD PERSON

COMPLETION DATE

RESOURCES NEEDED

Trustees seek external help in making the management and governance arrangements fit for purpose

Meet with Social enterprise experts

Clear direction and guidance about what is expected of NEETs

Chair of the trustees

9th May

None

A new staffing structure which better supports the manger in the strategic, operational and financial management of the organisation urgently needs to be implemented

Prepare paper for the next board meeting, with background issues, risks, options and recommendations detailed for discussion by the board

A new organisational structure

Chief exec

Report by 9th May

Implementation by …

Costs to be included in the report

All trustees should receive training on their roles and responsibilities in relation to the new structure and governance

Training for trustees

Improved awareness by trustees of their role, more support for trustees and therefore improved support for the management

Chief exec

23rd May

To be priced

Continuation of Funding from SLA to provide free training

Statutory income

Assuming SLA is the same for 2014 as 2013

SLA Funding / 7 units

Per unit

Total units 10

5042,584

£720,369

£7203,691

Income for providing training based on full cost recovery

Assuming the course length is 1 – 3 days per week for voluntary work experience for up to 6 months. With a view to gaining essential work skills and progress onto an apprenticeship

Course cost £1,500 per person

Each unit has 6 classrooms

Each classroom holds 30 students

Costing as follows

£5042,584 / 12 months

Course cost based on full cost recovery

Number of units

Number of classrooms per unit

Students per class

Based on full occupancy

Amount of funding / SLA required

£1,500

7

6

30

315,000

£1,500 *7 * 6* 30 = 31500

Opportunity

An opportunity has arisen for NEETs from one a young lady who gained significant skills in IT through the charities courses. She has become a successful entrepreneur and wants to invest £250,000 into the charity as an investment which she will want returned to her in 2020 and in the meantime will receive an interest rate of 1% as a return from the charity.

Benefits of social investment

This would have massive impact on the charities status enabling them to achieve their objectives by making them more sustainable. Social Investment has the potential to encourage innovation, support income diversification when a need for alternative finance is required.

The social investment would give the charity extra capital to invest into achieving its aims and objectives. Although there are risks with social investments especially for the investor who could incur a financial loss resulting in damaging the investor’s reputation.

Success on the investment

To manage the success on the investment the board would need support to build their skills and capacity to be ready for the investment, Independent advice would be sought by the trustees, and tailored support with business planning advice and learning from other charities who had received investments.

Assessment of impact on the balance sheet over the next five years

Option 1

  1. Assuming £250,000 is invested into a medium - high risk investment portfolio, based on the calculations below over 6 years, NEETs would receive £489,031 in interest giving them an opportunity of doubling their social impact and the investor would receive £7,465 plus £250,000 returned investment.

Calculations based on the investment:

Medium - High risk

Base Amount £250,000

Assuming interest rate is based on 20% added at the end of the year

Effective annual rate20%

Calculation period 6 years

Investment return plus 1% per year

Interest added at the end of the year

YEAR

INTEREST EARNED

TOTAL INTEREST

BALANCE

1% RETURN

TOTAL INVESTMENT RETURNED

1

50,000

50,000

300,000

3,000

2

60,000

110,000

360,000

3,600

3

72,000

182,000

432,000

4,320

4

86,400

268,400

518,400

5,184

5

103,680

372,080

622,080

6,221

6

124,416

496,496

746,496

7,465

257,465

Option 2

  1. Assuming £250,000 is invested into a low - medium risk investment portfolio, based on the calculations below over 6 years, NEETs would receive £322,483 in interest and the investor would receive £5,782 plus £250,000 returned investment.

Calculations based on the investment:

Low to Medium Risk

Base Amount £250,000

Assuming interest rate is based on 15%

Effective annual rate15%

Calculation period 6 years

Investment return plus 1% per year

Interest added at the end of the year

YEAR

INTEREST EARNED

TOTAL INTEREST

BALANCE

1% RETURN

TOTAL INVESTMENT RETURNED

1

37,500

37,500

287,500

2,875

2

43,125

80,625

330,625

3,306

3

49,594

130,219

380,219

3,802

4

57,033

187,251

437,251

4,372

5

65,588

252,839

502,839

5,028

6

75,426

328265

578,265

5782

255,782

Option 3

  1. Assuming £250,000 is invested into a low risk investment portfolio, based on the calculations below over 6 years, NEETs would receive £165,082 in interest and the investor would receive £4,193 plus £250,000 returned investment.

Calculations based on the investment:

Low Risk

Base Amount £250,000

Assuming interest rate is based on 9% Interest added at the end of the year

Effective annual rate9%

Calculation period 6 years

Investment return plus 1% per year

Interest added at the end of the year

YEAR

INTEREST EARNED

TOTAL INTEREST

BALANCE

1% RETURN

TOTAL INVESTMENT RETURNED

1

22,500

22,500

272,500

2,725

2

24,525

47,025

297,025

2,970

3

26,732

73,757

323,757

3,237

4

29,138

102,895

352,895

3,529

5

31,760

134,655

384,656

3,846

6

34,619

169,275

419,275

4,193

254,193

Option 4

Based on the calculation below investing £200,000 and using the other £50,000 as a capital for a fundraising campaign could result in a loss for the investor and the charity. This is not an option I would recommend.

Assuming £200,000 will be invested

Calculations based on the investment:

Medium to high risk

Base Amount £200,000

Interest rate20% Interest added at the end of the year

Effective annual rate20%

Calculation period 6 years

Investment return plus 1% per year

Interest added at the end of the year

YEAR

INTEREST EARNED

TOTAL INTEREST

BALANCE

1% RETURN

TOTAL INVESTMENT RETURNED

1

40,000

40,000

240,000

2,400

2

48,000

88,000

288,000

2,880

3

57,600

145,600

345,600

3,456

4

69,120

214,720

414,720

4,147

5

82,944

297,664

497,664

4,976

6

99,533

397,197

597,197

5,971

257,464.96

Option 5

Assuming £200,000 will be invested.

Calculations based on the investment:

Low to Medium Risk

Base Amount £200,000

Interest rate15% Interest added at the end of the year

Effective annual rate15%

Calculation period 6 years

Investment return plus 1% per year

Interest added at the end of the year

YEAR

INTEREST EARNED

TOTAL INTEREST

BALANCE

1% RETURN

TOTAL INVESTMENT RETURNED

1

30,000

30,000

230,000

2,300

2

34,500

64,500

264,500

2,640

3

39,675

104,175

304,175

3,041

4

45,626

149,801

349,801

3,498

5

52,470

202,271

402,271

4,022

6

60,340

462,612

462,612

4,626

204626

Option 6

Assuming £200,000 will be invested.

Calculations based on the investment:

Low Risk

Base Amount £200,000

Interest rate9% Interest added at the end of the year

Effective annual rate9%

Calculation period 6 years

Investment return plus 1% per year

Interest added at the end of the year

YEAR

INTEREST EARNED

TOTAL INTEREST

BALANCE

1% RETURN

TOTAL INVESTMENT RETURNED

1

18,000

18,000

218,000

2,180

2

19,620

37,620

237,620

2,376

3

21,386

59,005

259,006

2,590

4

23,310

82,316

282,316

2,823

5

25,408

107,724

307,725

3,077

6

27,695

135,420

335,420

3,354

203,354


[1] CIPFA Certificate in charity finance and accounting: coursework assignment

[2] www.socialenterprise.org.uk/


[lf1]