ON the face of it there is a world of difference between charities and business. The one sector exists to do good works, the other to make profits.

But changing times and circumstances are conspiring to blur the differences. Just as increasing numbers of companies are beginning to realise that they have a responsibility to their communities, so extra responsibilities and falling donations as a result of the recession - not to mention a few scandals - are forcing charities to look at the ways in which they manage their funds.

No wonder that Alec Reed - chairman of the recruitment agency Reed Executive and one of the judges in the business management competition aimed at encouraging school and college students to think about working with charities that is being run by the Chartered Institute of Management Accountants in association with the Independent and Sharp, the electronics company - believes that the financial management of charities 'isn't very different from business'.

Nevertheless, many charities remain ignorant of, or reluctant to use, basic business concepts that would improve their effectiveness. They have started to use financial accounting techniques in audits and are grappling with the application of the corporate governance issues in the Cadbury report.

But, according to Mr Reed, they will not face up to management accounting techniques that enable them to find out more about their operations. In contrast Ethiopia Aid, the charity his organisation runs, separates donors into 'cold' and 'warm' in order to discover what proportion of funds comes from each and so decide how best to target fund- raising activities.

It is a straightforward enough technique - the sort of thing that the financial services industry uses all the time to assess the value of various types of customer and the cost of dealing with them.

But, says Mr Reed, most charities will say that if an exercise has led them to spend, say, pounds 10,000 to raise pounds 5,000 they will never do that again - 'when it's just what they should be doing'. A commercial understanding would lead them to realise that they have done the hard part or made an investment that should now start to pay off.

Slow as they may be to catch on in this area, charities do appear to be grasping more general tricks of financial management. Indeed, as far as Stephen Burgess, finance director at Help the Aged, is concerned, the principles of financial management should permeate the organisation rather than be confined to the finance department.

Pointing out that the charity sector in general had become much more professional in recent years, he said: 'My job is to make sure that good commercial skills are an important part of everybody's job.'

While he has about 10 people performing traditional financial management roles, he has set about creating a culture that encourages good financial management techniques. The principles are just those of good conventional financial management.

'In charities you always find reasons to spend money. The important thing is how efficiently you spend it,' Mr Burgess says.

With such initatives as Care in the Community increasingly requiring charities to take on roles previously performed by the Government, this is a growing issue.

This is even more important for Action Aid, which runs many projects overseas. Christopher Clarkson, the financial controller, says a lot of time is spent 'looking at what they are achieving on the ground'. Like Mr Burgess, he is Cima-qualified and worked in industry before charities. While accepting that the use of similar yardsticks helps to break down the differences between the two worlds, he feels accountants are made to feel more accountable in charities.

Action Aid, with an income of about pounds 30m, is, like many other charities, hoping to increase its contacts with the corporate sector.

Charities have already started to run businesses for the sole purpose of raising money. These include shops and the increasingly popular mail-order catalogues. Mr Burgess believes this is just the beginning.

One way is to link the 'brand franchise' that the charity has with socially-minded businesses.

Pointing to the success of the Co-operative Bank, which has introduced a code of ethical lending, and other companies, Mr Burgess sees great advantages in developing a relationship between charities, employees and customers.

With many like Mr Reed fearing that the National Lottery will leave a dent in the pocket of charities when it starts up later this year, managers are going to need all their ingenuity to keep the income rolling in.

And, since the demands on that income are growing steadily heavier, they will need all the skills learned in the hostile corporate jungle to make it work.

(Photographs omitted)