Running a charity is incredibly rewarding work – you're making a huge difference. But even the most well-intentioned organisations can stumble when it comes to financial management. The good news? Most financial mistakes are entirely preventable with the right knowledge and systems in place.

At Bluebells Bookkeeping, we've worked with numerous charities and seen the same financial pitfalls crop up time and again. Here are the five most common mistakes we encounter – and more importantly, how you can avoid them.

1. Mixing Restricted and Unrestricted Funds

Many charities treat all their money as one big pot, failing to properly separate restricted funds (donations given for specific purposes) from unrestricted funds (general donations).

This can lead to compliance issues, donor trust problems, and difficulties in financial reporting. You might accidentally spend restricted funds on general expenses, which could have serious legal and reputational consequences.

Set up separate accounting codes or bank accounts for different funding streams. Implement a robust tracking system that clearly identifies the source and restrictions on every pound that comes in. Regular reconciliation between your donor records and accounting system is essential.

2. Poor Cash Flow Management

Assuming that having money in the bank means you're financially healthy, without considering when funds are actually available to spend.

Charities often receive large grants or donations that need to be spent over months or years. Without proper cash flow forecasting, you might find yourself unable to meet immediate obligations despite having a healthy bank balance.

Create monthly cash flow forecasts that account for when restricted funds can be spent and when regular expenses are due. Build a reserve fund for operational expenses, and always know your true available balance for day-to-day operations.

3. Inadequate Financial Controls

Having too few people involved in financial processes, or not having clear authorisation levels for different types of spending.

This creates opportunities for fraud, errors, and poor decision-making. It also means your charity might not meet the financial governance standards expected by funders and regulators.

Implement a system of checks and balances. Require two signatures on expenses above a certain amount, separate the duties of recording transactions and authorising payments, and ensure regular financial reviews by trustees who aren't involved in day-to-day operations.

4. Neglecting Regular Financial Reporting

Only looking at the finances when preparing annual accounts or when problems arise.

By the time issues show up in annual accounts, it's often too late to course-correct. Trustees can't make informed decisions without regular, accurate financial information.

Produce monthly management accounts that show income, expenditure, and cash flow against budget. Create simple, visual reports that non-financial trustees can easily understand. Schedule quarterly financial reviews with your board to discuss performance and any concerns.

5. Underestimating the True Cost of Projects

When applying for grants or planning projects, and only considering direct costs and forgetting about overheads, administration time, and hidden expenses.

This leads to projects that drain resources from other activities, or worse, projects that can't be completed properly due to insufficient funding.

Develop a comprehensive costing template that includes all direct costs, a fair proportion of overheads, staff time for administration and reporting, and a contingency fund. Don't be afraid to include these costs in grant applications – most funders understand that good projects require proper support.

Building Financial Confidence

These mistakes might seem daunting, but remember – they're all fixable with the right approach and support. The key is to view financial management not as a necessary evil, but as a tool that helps you achieve your charitable mission more effectively.

If you're recognising your charity in any of these scenarios, don't panic. Start with small improvements: better record-keeping, regular financial check-ins, or clearer policies around spending authorisation. At Bluebells Bookkeeping, we can support you in all of these areas, so if you don’t know where to begin, you needn’t worry. Every positive step you take strengthens your organisation's ability to create lasting impact.

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At Bluebells Bookkeeping, we specialise in helping charities build robust financial systems that support their mission. From setting up proper fund accounting to creating clear financial reports for trustees, we're here to help you avoid these common pitfalls and focus on what you do best – changing the world.