It’s the legal responsibility of the Board of Directors (or equivalent) to control the business, including all its spending.
Social enterprises and financial management
There are three key aspects of managing the finance of your business. First, you need to establish subsidiarity – consciously delegating the authority down to the proper level to authorise expenditure, meaning workers making a cup of tea don’t need to escalate the request to the Board.
This leads us to the second key factor – clarity. The business needs a clear policy (or policies) and budget(s) set by the Directors on what spending powers (how much, on what) are delegated and to whom. It’s also important to set standards, e.g. how employees go about claiming of travel and subsistence costs.
Authorisation of expenditure is one thing, actually making the payment is another. It is good practice for significant amounts of money to separate these functions and have different people carry them out.
This helps with the introduction of the third key word – accountability. It established who makes decisions and enables management to compare those with the business polices and budgets. It’s an effective way to make sure that no-one exceeds their authority, breaks the budget or sends money without authorisation. Now that at least two people are involved, whoever makes transactions will be responsible for evidencing it through appropriate records.
The hierarchy of managing finance in a social enterprise
The role of Directors is to support their finance worker(s) in imposing procedures that encourage everyone involved to understand how the accounts work and what they can do to improve the flow of book-keeping. It is also the responsibility of Directors to ensure that the business keeps accurate accounts and can draw up true and fair financial statements.
In return, you can ask for real-time information on business performance. Well run businesses do not wait until the following year for their accountant to tell them whether they have made a profit or a loss. You can stay updated and break the business down into constituent parts, analysing the profit and loss performance of each bit (contribution analysis). Your finance team can also compare actual financial performance with the projections, because they have drawn up financial control mechanism number one – the budget projections.
Difference between the actual and the budget could be caused by lack of understanding of the business, a change in an external, wastage or fraud. The Directors will need to investigate and regain control as quickly as possible.
Management information is power. The accounts are a really good source of information which empowers you to see inside the business and focus on what you need to spend management resources on. Slow information flow reduces that value.
Mutual Trading Status
If a social business is a consortium of organisations that only sells services to its members, it may qualify for Mutual Trading Status (MTS) with HMRC, so that trading activity is not taxed twice.
For more information visit the GOV.UK website.
Once you’ve established how your finance is controlled, move on to reviewing the management of your human resources.
Social business help and support from Business Wales
Business Wales offers a wealth of information, advice and guidance for business owners. Below, we’ve listed some useful resources for controlling your social business finance.