Blog: Dealing with financial difficulties, for charity trustees

By Ann Breslin, Commission Policy and Research Manager

The Commission is aware that many charities are facing the double challenge of a sudden fall in income with the loss of valued staff, who have been seeking alternative employment during this period of uncertainty.

This guidance has been designed for charity trustees, especially of smaller charities, who may not have access to professional advice. It sets out some practical steps charity trustees can take to manage their charity through these financial difficulties and, if necessary, plan for the uncomfortable possibility that your charity may not survive this drop in funding.

When managing this crisis charity trustees must do all that they can to ensure their charity is operating for the public benefit, within the purposes for which they were established and following the principles of good governance and maintaining good financial records.

You will find information on:

• Assessing your charity’s current financial situation.
• Identifying when your charity is at risk of running out of funds.
• Developing a recovery plan.
• Charity trustee liability.
• What to do if your charity cannot continue to operate because of the loss of funds.

The Commission has more extensive guidance on how to manage your charity, available on the website.

Step 1: Assessing your charity’s current financial situation.

It is important to have as accurate a picture as possible of your charity’s current financial situation. This will help you to identify what actions are urgent and need to be addressed and the time you have available to develop and implement a plan to respond to the financial pressures. Many charities are likely to have a shortfall of income at this time.

Begin by assessing current cash flow over a range of timescales, for example the next few weeks, three months and six months. Identify:

• all the payments the charity will have to make the coming weeks/months
• what cash is currently available to cover these payments
• what income, if any, the charity expects to receive over the coming weeks and months.

This information should enable you to identify whether the charity is at risk of running out of the cash it needs and when that shortfall will happen. By identifying when it is likely to happen charity trustees will be able to assess how to help your charity continue in the short term and recover in the longer term.

Step 2: Identifying when your charity is at risk of running out of funds.

To forecast when the charity is at risk of running out of funds make a list of the bills the charity will not be able to pay when they fall due. Also list activities, projects or other commitments which will have to be cancelled or deferred.

Consider whether activities or events that are cancelled or deferred due to the social distancing rules free up some money to meet your shortfall. Also consider whether the charity has any reserves which could be used to cover any shortfall.

Step 3: Developing a recovery plan.

If after assessing all this information you believe your charity can continue to operate develop a recovery plan.  This plan will focus on reducing your costs and trying to increase your income. Consider how to reallocate volunteers or staff to tasks which are relevant to surviving the financial difficulties.

To reduce your costs:

• speak to your bank at an early stage, avoid allowing the charity’s account to become overdrawn without the bank’s agreement and be clear about any bank fees that this will give rise to.
• review direct debits and other regular payments to identify which can be ended or delayed. Always bear in mind any cancellation costs which you will have to pay.
• speak to funders about the effects of cancelling or delaying activities that are part of funding agreements.
• consider rescheduling loans repayments over a longer timescale or entering into a voluntary arrangement with creditors. Consider these steps carefully as there are costs and risks to be considered.
• identify any supporters who may be able to give you an interest free loan or bring forward donations.

To raise cash and generate income consider:

• use of any remaining reserves
• new or increased loan or overdraft facilities
• bringing designated funds back into general use
• support from government
• emergency fundraising appeals to your supporters
• using online fundraising platforms.

If using online fundraising platforms be sure to consider the amount of funds raised which the platform will take as payment.

Some charities may be able to consider the use of permanent endowment funds, provided that the Commission does not object, or the sale of assets that are not subject to restrictions. You will find more information about what different types of charities may require in such circumstances in the Commission’s Consents for charitable companies and New powers for unincorporated organisations guidance. Some charity trustees may also identify one off actions, that they believe to be in the charity’s best interests, but they do not have the power in their governing document to carry out this action. If this is the case they should see the Commission’s Authorising transactions guidance for further information.

Throughout the current crisis and beyond continue to monitor and review your finances. This will assist you in deciding if you can continue to deliver your charitable activities. Where possible, continue to maintain the cash flow forecast described in step 1 so that you have an up-to-date forward-looking view of when money will be received and spent.

Charity trustee liability

When considering what actions to take it is important to remember that any steps taken must be in the best interests of the charity, of beneficiaries and must protect the charity’s assets. Record the information considered and decisions that are reached.

As trustees you will generally be protected when you have carefully applied your skills and experience to decisions and taken advice when needed. We recognise that these decisions will often be difficult, that there may not be an obvious ‘right’ decision, and that charities may be exposed to higher levels of risk than in they have been before.

For more information about trustee liability, see section 7.5 of the Commission’s Running your charity guidance. This sets out tips on how to reduce or avoid charity trustee personal liability.

Step 4: What to do if your charity cannot continue to operate because of the lack of funds.

Despite the best efforts of charity trustees to act in their charity’s best interests things may still go wrong. Therefore, it is very important to develop a plan which identifies the point at which, if the recovery plan is not succeeding, the charity has to close or to merge with another charity. See the Commission’s Mergers and Closures guidance for more information.

A charity reaching the end of its life can be a sad occasion, but in many circumstances it can be the best decision charity trustees can make to protect their beneficiaries, the charity sector and the legacy of their charity. If your charity must close it is better to have a plan for an orderly closure rather than allowing this to happen in a chaotic and damaging way.

If you believe your charity may not survive this difficult period, you should consider when to develop plans to close. Agree who will do this and when to trigger closure if the recovery plan does not succeed. Follow these practical tips:

• Check your governing document to see what the process is for the charity to close. If this is not clear, seek advice.
• Make a plan so when it comes to winding up you follow the agreed process – share this plan and get agreement, where possible, with beneficiaries, staff/volunteers and stakeholders.
• Ensure the debts of the charity are settled and consider the financial cost of a closure.
• Think carefully about how your bank accounts are going to be managed, and how payments are going to be made. Ensure that all payments, including final payments, are appropriately signed off.
• Being transparent will help you to manage risks. Communicate with staff about the impact of closure. The normal legal provisions regarding redundancy continue to apply during this crisis and it is essential that employers carefully plan and prepare for handling redundancies, given the sensitivity of the issue and personal impact on employees and their families. The Labour Relations Agency is a good source of help and advice for employment matters. Communicate with beneficiaries and stakeholders about the impact of the closure. For example: put a notice on your website or Facebook page explaining why you are closing and record clear statements and resolutions in meeting minutes.
• Ensure all trustees are aware of their financial and legal responsibilities.
• Find out what you need to do to ensure any tax liabilities are paid.
• Consider the charity’s social media accounts. You will need to either close them or transform them into something else. If you are going to keep them, think about photos and other personal data.
• If the charity has a permanent endowment consider the process for disposing of it. See the Commission’s New powers for unincorporated organisations guidance.
• Consider getting independent advice.
• Ensure the appropriate information is sent to the Commission and complete an online closure form.