TLDR (too long didn’t read):
Not-for-profits – including charities, CICs, social enterprises, and community organisations – must generate surpluses to stay sustainable and grow. Smart financial management ensures compliance, transparency, and the ability to reinvest in your mission. Let’s break down why surpluses matter, the key not-for-profit accounting strategies, and how Harland Accountants can support your organisation’s financial health.
Understanding the Misconception
The term “not-for-profit” often causes confusion, many think it means you shouldn’t make money. In fact, not-for-profits need to make a surplus to:
- Reinvest in services and community projects
- Build up reserves for future uncertainties
- Show funders and stakeholders you’re financially stable
Charities and not-for-profits face challenges in managing finances, but generating a surplus is essential for long-term viability.
Why Profit Matters in the Third Sector
Here’s why turning a profit in (or surplus) in your not-for-profit accounting matters:
Stability
Relying only on grants or donations is risky. A surplus gives you breathing room.
Growth
Want to expand your services? You’ll need financial headroom to do it.
Emergencies
From funding cuts to rising costs, a surplus helps you weather the storm.
Credibility
Funders and stakeholders want to see you’re financially well managed.
The Problem with 'Just Breaking Even'
Breaking even might sound safe, but it leaves you without a safety net. A healthy surplus means you can plan ahead, fund new projects, and cope with challenges – essential for any purpose-driven organisation.
Key Not-for-Profits Accounting Tips
1. Solid Financial Controls
This means separating key financial roles (so no one person has full control over transactions), setting clear spending limits and authorisation procedures, reconciling accounts regularly, and having clear, written finance policies. Controls should cover everything from handling cash and online banking to preventing fraud, ensuring accurate reporting, and meeting Charity Commission (or other regulator) requirements. These measures protect your organisation’s funds, ensure compliance, and build trust with funders and stakeholders.
2. Regular Financial Reporting
Stay transparent and informed with regular financial reports. It helps you track your performance, make better decisions, and keep funders in the loop.
3. Know Your Tax Obligations
Not-for-profits still face tax considerations. Some activities are tax-exempt but others (like trading) might be taxable. Gift Aid and VAT considerations are essential to understand.
4. Plan for Reserves
A reserves policy helps you cover future costs, demonstrate financial responsibility, and meet regulatory expectations. The Charity Commission has excellent guidance on financial controls and reserves policies for charities and not-for-profits.
FAQs
Yes! Generating a surplus is essential for sustainability. It means you can reinvest in your mission and be ready for the unexpected.
There’s no one-size-fits-all answer. it depends on your size, activities, and risk level. A good reserves policy, backed by charity commission guidance, is the way to go.
Sometimes. Many charitable activities are tax-exempt, but trading activities might be taxable. It’s important to understand the differences and get expert advice if needed.
Final Thought: Profit Isn’t a Dirty Word
Let’s be clear – not-for-profits still need to make a profit. It’s not about lining pockets or turning your mission into a money-making machine. It’s about building a secure foundation for the future: having the financial breathing room to weather storms, plan for growth, and keep doing the brilliant work you’re passionate about. A healthy surplus isn’t just a buffer – it’s a sign that your organisation is strong, stable and ready to tackle whatever comes next. With the right approach to financial management, you can ensure your resources are working hard for your mission and your community.
How Harland Accountants Can Help
At Harland, we work with charities, CICs, social enterprises, and not-for-profits across the UK. We understand your challenges and provide jargon-free tailored advice combined with financial services specifically for the third sector, such as charity accounting and reporting, budget planning/forecasting, and compliance with the Charity Commission and Companies House.
If you’re ready to build a sustainable financial strategy that supports your mission and keeps your organisation strong for the future, get in touch with our expert team.
Explore more from the Profit and Purpose series
This article is part of our Profit and Purpose series, where we explore how ambitious businesses can grow sustainably while making a positive impact. If you’re inspired to build a business that’s both commercially successful and consciously driven, we’ve got more insights to share. Head over to the full series to keep reading and discover how profit and purpose can go hand in hand.
