Financial reporting is a critical part of running a charity; but for many Tier 3 organisations, it can feel like a minefield. With limited resources and volunteer-led teams, mistakes are easy to make and often hard to spot until it’s too late.
This post highlights some of the most common financial reporting pitfalls we see in small charities and not-for-profits, and how you can avoid them with a few simple systems and habits.
Why Financial Reporting Mistakes Matter
Even small errors can lead to:
Misleading reports to your board or funders
Non-compliance with Tier 3 reporting standards
Audit issues or funding clawbacks
Loss of trust with stakeholders
The good news? Most mistakes are preventable with the right setup and a bit of regular attention.
1. Misclassifying Income
Not all income is created equal. Donations, grants, and earned income (like sales or service fees) should be recorded separately.
Why it matters:
Misclassifying income can distort your financial reports and make it harder to meet funder reporting requirements.
Tip:
Set up clear income accounts in Xero for each type of revenue to suit your charity. For example:
“Donations”
“Grant Income”
“Sales – Workshop Fees”
2. Not Reconciling Bank Accounts Regularly
Reconciling your bank accounts ensures that your Xero records match your actual bank activity. Skipping this step can lead to missing transactions, duplicate entries, or inaccurate balances.
Best practice:
Reconcile weekly or monthly, depending on your transaction volume.
Tip:
Use Xero’s bank feeds and bank rules to speed up the process.
3. Using Vague Expense Categories
Generic categories like “General Expenses” or “Miscellaneous” make it hard to understand where your money is going and harder to report accurately.
Solution:
Tailor your chart of accounts to reflect your actual activities. For example:
“Volunteer Training”
“Event Catering”
“Programme Supplies”
Bonus:
This also helps with preparing your Statement of Service Performance under Tier 3.
4. Forgetting to Track Restricted Funds Separately
If you receive funding that must be used for a specific purpose (e.g., a grant for youth programmes), you need to track that income and spending separately.
Why it matters:
Failing to do so can lead to non-compliance and jeopardise future funding.
Tip:
Use Xero’s tracking categories to tag restricted income and expenses. You can then run reports by funding source to show exactly how the money was used.
5. Not Saving Source Documents
Every transaction should have a supporting document; whether it’s a receipt, invoice, or funding agreement.
Why it matters:
Having source documents attached to transactions makes audits easier, improves transparency, and protects your charity if questions arise.
Tip:
Use Xero’s file upload feature or mobile app to attach documents directly to each transaction.
6. Overlooking the Statement of Service Performance
Tier 3 charities are required to report not just on finances, but on what they did and what they achieved. This is called the Statement of Service Performance.
Common mistake:
Leaving this section vague or incomplete.
Solution:
Track your outputs and outcomes throughout the year—e.g., number of workshops held, people supported, volunteer hours contributed—and link them to your financial activity.
Bonus Tip:
Make sure to track and have proof for your non-financial metrics in the same way you have source documents for income and expenses. This will help you big time during your audit. E.g. You held 10x Youth Employment pathways workshop’s during the year. A simple ‘source document’ would be a sign-in sheet for attendees showing proof that you did hold the event.
Want Help Getting Your Financial Reporting Right?
At Varntige, we help Tier 3 charities set up Xero and financial systems that support accurate, compliant reporting. From chart of accounts to tracking categories and audit-ready documentation, we’ll help you avoid the common pitfalls and feel confident in your numbers.
Book a free consultation or ask us about our Xero setup and Tier 3 reporting support.
