Smart Money, Stronger Mission: Financial Literacy for Your Charity Team

Introduction

Effective financial management is vital for the success and integrity of any charity. The duty of managing charity money responsibly rests with the organisation’s “Responsible Persons”—the board or committee members who are legally obligated under Australian Charities and Not-for-profits Commission’s (ACNC)Governance Standard 5 to ensure the charity’s financial affairs are managed properly.

Fulfilling this critical role hinges on strong financial literacy, which empowers board members to understand financial reports, assess solvency, and make informed decisions. This guide offers practical insights and actionable steps to enhance the financial skills of your team, ensuring they can confidently protect the charity’s resources and advance its mission.

Understanding Financial Literacy for Your Charity

The Legal Standard for Financial Knowledge

Responsible Persons for a charity have a legal obligation to possess a level of financial understanding that allows them to make informed decisions. This standard for director financial literacy is broadly defined as the ability to read and understand fundamental financial statements, including the balance sheet, income statement, and statement of cash flows.

This requirement is formalised under regulations like ACNC Governance Standard 5, which mandates that charities ensure their leaders manage financial affairs responsibly. Landmark legal cases, such as Australian Securities and Investments Commission v Healey [2011] FCA 717, have established that simply relying on financial experts is not enough. Directors are expected to apply their own minds to, and understand, the financial statements they approve.

Why Basic Financial Concepts Are Essential for Your Charity

A basic understanding of financial concepts is essential because Responsible Persons cannot make sound decisions about their charity’s finances without it. While not every board member needs to be a financial expert, each individual must have sufficient financial literacy to read and understand the charity’s accounts and reports. This responsibility for managing charity money cannot be delegated entirely to a treasurer or another board member with financial expertise.

This foundational knowledge is critical for fulfilling core duties. At a minimum, every Responsible Person should be able to use financial information to:

• Determine whether the charity is solvent and able to pay its debts.
• Understand the potential financial impact of any decision the board makes.

Core Financial Obligations for a Charity’s Responsible Persons

Ensuring Responsible Financial Management & Avoiding Insolvency

Under the ACNC Governance Standard 5, a primary obligation for Responsible Persons is to ensure the charity’s financial affairs are managed responsibly. This duty is fundamental to protecting the charity’s assets and ensuring its long-term viability.

A key part of this responsibility involves the legal requirement to prevent the charity from operating while it is insolvent. A charity is considered solvent when it can pay all its debts as and when they become due.

To avoid insolvency, Responsible Persons should implement strong financial controls and diligent management practices. Key actions include:

• Monitoring Solvency: Regularly review the charity’s accounts to ensure its assets (what it owns) exceed its liabilities (what it owes).
• Tracking Cash Flow: Keep a close watch on the money moving in and out of the charity. If spending consistently exceeds income, it can be a warning sign of potential insolvency.

If you believe there is a risk that your charity is or may become insolvent, you must take immediate action and contact the ACNC.

Acting with Diligence & Care in All Finance Matters

Responsible Persons have a duty to act with reasonable care and diligence in all matters, including those related to finance. This means being appropriately informed about the issues on which you are making a decision.

You should be encouraged to ask questions about your charity’s finances and accounts to ensure you have a clear understanding. While not every board member needs to be a financial expert, each has an individual responsibility to engage with the financial information presented.

Relying solely on a treasurer or another board member with financial expertise is not sufficient to meet this duty. Possessing the financial literacy to read and understand financial reports is essential for making sound, informed decisions that support the charity’s mission.

Disclosing & Managing Financial Conflicts of Interest

Another critical duty under ACNC Governance Standard 5 is the obligation to disclose any potential or actual conflicts of interest. This ensures that all financial decisions are made honestly, fairly, and in the best interests of the charity and for its charitable purposes.

A conflict of interest can arise when a Responsible Person’s personal interests or their duties to another organisation could improperly influence their decisions at the charity. It is essential to declare and manage these conflicts transparently.

This is particularly important for smaller charities or those in close-knit communities where personal and professional roles are more likely to overlap. By managing conflicts effectively, the board can protect the charity’s integrity and maintain public trust.

Key Financial Risks from a Lack of Financial Literacy

Increased Vulnerability to Fraud & Theft

A lack of financial literacy among a charity’s leaders can significantly increase its vulnerability to fraudulent activities. Fraud involves dishonest actions, such as making false representations or abusing a position for personal benefit. When Responsible Persons cannot adequately scrutinise financial records, it creates opportunities for both internal and external parties to commit theft or financial misconduct.

All charities must be vigilant against these risks, but smaller organisations with tighter budgets are particularly susceptible. Even minor incidents of fraud can lead to severe consequences, including the collapse of the charity and potential legal action. Therefore, having robust processes for managing charity money is a critical protective measure.

Inefficient Operations & Wastage of Charity Funds

Poor financial literacy can lead to the inefficient use of a charity’s resources and funds. If board members are unable to properly read and interpret financial reports, they cannot effectively monitor budgets or make strategic decisions about spending. This can result in wastage that diverts precious funds away from the charity’s core mission.

This lack of oversight may also constitute a breach of ACNC Governance Standard 5. This standard places a clear obligation on Responsible Persons to ensure the charity’s financial affairs are managed responsibly. Inefficient operations stemming from poor financial literacy can be seen as a failure to meet this fundamental duty.

Loss of Public Trust & Confidence in Your Charity

Financial mismanagement, often rooted in a lack of financial literacy, can severely damage a charity’s reputation. Public trust and confidence are essential for securing donations, grants, and volunteer support, which are the lifeblood of most charitable organisations. Any perception of financial incompetence can quickly erode this trust.

This loss of confidence not only affects the individual charity but can also harm the reputation of the entire sector. When donors and supporters lose faith in a charity’s ability to manage money effectively, they are less likely to provide future support. Maintaining public trust is a key objective of the ACNC and a fundamental responsibility for every charity.

How to Improve Financial Literacy on Your Charity’s Board

Assess Current Knowledge & Engage in Training

A practical first step for any board is to assess the current financial literacy of its members. This helps to identify individual strengths and areas for improvement, ensuring that learning efforts can be targeted effectively. By understanding the existing knowledge base, your charity can determine if it meets the required standards for responsible financial oversight.

While formal training is an essential part of improving financial literacy, it should be viewed as the beginning of an ongoing educational journey. To be most effective, training should:

• Cover the strategic fundamentals of your charity’s financial position, performance, and solvency
• Incorporate your organisation’s own financial statements whenever possible
• Help board members apply new concepts directly to their roles

This approach helps Responsible Persons become more familiar with financial terminology and the potential problems that can arise from poor financial practices.

Develop a Routine for Financial Monitoring & Peer Support

Establishing a regular and structured routine for reviewing financial statements is crucial for building competence and confidence. Instead of reading reports from start to finish, a more effective method is to read across the statements to analyse specific aspects of the charity’s financial story. For example, you might look at the cash balance on the balance sheet and then examine the cash flow statement to understand the activities contributing to that balance.

Fostering a culture of peer learning and support can significantly enhance the board’s collective financial literacy. To achieve this, you can:

• Encourage members to ask questions and seek clarification from financial experts on the board or in management
• Set up informal mentoring sessions to review financial statements before meetings
• Pair less experienced directors with more financially savvy colleagues

This collaborative approach not only improves individual understanding but also strengthens the board’s dynamics and commitment to managing charity money responsibly.

Implementing Strong Financial Controls in Your Charity

Establishing Budgets & Regular Finance Reports

A budget is an essential tool for any charity, as it provides a forecast of expected income and expenditure over a specific period. It is considered good practice to establish an annual budget and consistently track your charity’s performance against it throughout the year. This process is fundamental to managing charity money responsibly.

When monitoring performance, you should investigate any significant variations between the budgeted figures and the actual results. This proactive approach helps identify potential issues early and allows for timely adjustments.

The board has the ultimate responsibility for the financial health of the charity. To fulfil this duty, it must receive and review up-to-date financial reports at regular intervals. These reports provide the necessary information for the board to make informed decisions and ensure the organisation’s ongoing viability.

Requiring Multiple Signatories & Clear Spending Delegations

To enhance supervision over your charity’s financial transactions, it is a good idea to require multiple people to authorise payments and receipts. Involving more than one person in authorising and completing transactions adds a crucial layer of accountability.

Another important control is the establishment of clear financial delegations. Your charity should have policies that clearly define how much staff and management are permitted to spend without seeking higher approval. For example, a policy might allow a Chief Executive Officer (CEO) to authorise spending up to $5,000, with any amount exceeding this requiring board approval.

Securing Bank Accounts & Financial Information

Protecting your charity’s financial information is a critical component of sound financial management. This involves securing both digital and physical assets to prevent misuse and ensure funds are protected.

To properly secure your accounts and information, your charity should:

• Safeguard access details: Ensure that passwords for online banking are kept secure and changed regularly.
• Secure physical assets: Keep keys to any safes or petty cash tins in a secure location.
• Limit access: Restrict access to bank accounts and sensitive financial information to authorised individuals only, and maintain a clear record of who has these permissions.

Conclusion

Responsible Persons have a fundamental obligation to achieve financial literacy, which is essential for responsibly managing charity money and upholding ACNC Governance Standard 5. This understanding enables board members to interpret financial reports, mitigate risks like fraud and inefficiency, and implement strong controls to protect the charity’s assets and mission.

Fulfilling these financial responsibilities is crucial, contact our team at LawBridge for a specialised guidance you need. Our not-for-profit services law firm will ensure your charity’s financial management is secure, compliant, and positioned for success.

Frequently Asked Questions