Paula Sussex, the CEO of the Charities Commission recently said:-
“The economic reality for charities across the UK is a challenging one. But trustees will better serve those they need to support by exploring mergers and collaborations, diversifying income streams or taking other steps to manage those difficulties at an early stage. A head-in-the-sand approach raises concerns about the ability of trustees to run their charities effectively. Charities should not take unmanaged risks, but the risk of doing nothing is only too real and the consequences can be devastating, particularly where vulnerable beneficiaries are involved.”
The commission recently reviewed 94 charities with Income over £1 million, the level over which they consider a charity to be large. These charities accounted for a collective Income of £462 million, so no small beer. The charities were chosen because their auditors had highlighted possible financial difficulties.
Indicators that they used to highlight potential financial difficulties were:-
• Net current liabilities (current liabilities greater than current assets);
• Creditor support – normally the bank but in some cases it was trade creditors;
• Uncertainty over future funding;
• Contingent liabilities (a known problem on the horizon).
Likewise, the main reasons behind these difficulties were:-
• Difficult economic climate – 22 charities cited this as a primary reason
• Dependence on public sector funding
• Set up or restructuring costs
• Pension scheme deficits
• Unplanned overspends
It is likely that many charities reading this would recognise at least one of these issues as being potentially relevant to them, even if they don’t consider themselves at risk at the moment. It is the Trustees responsibility to ensure good financial governance exists regardless of the charity’s size and if there is any doubt about the financial stability of a charity, we recommend some or all of the following actions are undertaken as quickly as possible:-
• Monthly financial reporting, including a 12 month cash flow forecast. If a charity has identified potential financial difficulty, then they should consider weekly cash flows to identify critical peaks and troughs.
• Review your business model – do any services need to be stopped? Do any services cost more than the income you have to allocate to them?
• Review timing of receipts and payments – can receipts be accelerated and payments reasonably delayed?
• Can some costs be renegotiated?
• Look at alternative sources of income – if your charity applies for grant funding, try and make sure that your applications are made to relevant organisations where you have a chance of making a successful application.
• Have you made sure that you have reclaimed all Gift Aid that is due on donations made to you.
• Look at how effective your database is – people can’t support you if they don’t know you’re there.
• Consider how you can work with other Charities in your sector – this may range from cost sharing on items such as insurance, to a full scale merger.
Most of these recommendations seem obvious, but it is surprising how many charities still don’t cover them. It is clear that the Charities Commission will try and support Charities with information and guidance as much as possible. However, in the end it is a Trustee’s responsibility, and the Commission will review carefully the role of the Trustee in any financial failure.