Charities should abolish the role of treasurer, replace annual budgets with rolling forecasts, and turn management accounts upside down, an audience of finance directors and trustees heard yesterday as part of Charity Finance Week.
Hilary Seaward, a freelance accountant and winner of the Charity Finance Group’s first Adrian Randall Prize for innovation in charity finance, said she felt charities should ditch annual budgets and start again with a blank piece of paper. She also cautioned against letting trustees say that they "Don't do numbers".
Seaward was speaking at The Importance of Financial Skills on Boards, part of Civil Society Media's inaurgural Charity Finance Week, which was sponsored by Cazenove Capital.
“The role of treasurer is a dangerous position," she said. "It's too important for just one person to do. It’s such a dangerous role that I think it should be abolished.”
Seaward said that charities exist to spend money, not to make money, and that this should change the focus of how management accounts and budgets were put together.
She said that budgets were often seen as a form of control, but they often acted as a ceiling and caused charities to spend less than they needed on a particular thing. She also said that they tied charities into artificial horizons.
“Charities run multi-year projects,” she said. “They don’t stop on the 31st March and start again on the 1st April.”
She said that many charity budgets were treated as something which was not to be deviated from.
“But they’re often set months before the start of the financial year,” she said. “Long before people actually know what is going to happen. But your control system has to be as flexible as the environment you’re trying to control, or it won’t work.”
She said it was much more effective to start with a rolling forecast and adjust it as time went by and new information came in.
She said that variances – measures of where a figure is different from budget – suggest that people are wrong for not meeting the budget, rather than the budget being wrong for not accurately predicting the future.
“I think variances should be abolished too,” she said, “as well as treasurers. Instead of variances, look at trends. Ask whether you’re accurately tracking the trend.”
She said they meant that targets become something to meet, not beat, and that too many people, once they hit a target, would simply stop.
She said that charities should start by identifying what they want to achieve, and then their aspirations for the future, over whatever was the most appropriate timescale, and use forecasts to help them get there.
“The budget is nothing more than your preliminary forecast,” she said. “The question is what you want to achieve, and how are you going to pay for it. What financial resources do you need to get there.”
She said that charities should start the budgeting process by thinking about people, not numbers.
“You’re there to help people,” she said. “And people are the main tool you have to do that. Your question is: what is the necessary expenditure to give them the resources they need.”
Nobody can destroy a charity like trustees
James Brooke-Turner, investment director at the Nuffield Foundation, told the seminar that charities needed to think differently about risk and be in a position where you can respond to unexpected events.
“We have something called the window-box principle,” he said. “At Nuffield, one of our window boxes fell off a ledge one day and didn’t kill anyone. That wasn’t on any of our risk registers."
He said that most things which go wrong will not be on a risk register, and that the important thing was that a charity had a sufficient level of flexibility to cope with unexpected events.
“Governance is the most important thing and also the cheapest,” he said. “Nobody can destroy the value of a charity’s endowment like trustees.”