Doing it for charity: time for a financial health check?

It’s not exactly news that the charity and not-for-profit sectors are facing stresses and strains at the moment. Even before the Oxfam scandal broke earlier this year, charities were facing challenges; raising income; and maintaining their support base. The reasons for this are many-fold, but a major factor is a rise in the number of charities combined with reductions in public and government funding.

To put it almost too simply, more organisations are fighting for slices of an increasingly smaller pie and this can present a huge challenge to a charity meeting its objectives whilst remaining financially viable.

In many cases this issue is amplified by the typical make-up of a small to medium sized charity board: trustees can tend to be volunteers who have a passion for the charity’s work, rather than necessarily being those with the business or financial knowledge necessary for efficient operations.

All hope, however, is not lost. Passion counts for more than just something and, more often than not, a Board is made up of exactly the right people needed to make decisions in the best interests of the charity’s beneficiaries: they just might need some assistance along the way.

So what then should a Board or a charity’s management consider when they have concerns about future funding or cash flow?

1. Seek professional advice

It probably comes as no surprise that the first suggestion is to seek advice. There are professionals out there whose business is quite literally to turn organisations around. Helping management make the decisions necessary to streamline and improve the efficiency of their operations.

This doesn’t mean having to bring someone in full time to do a wholescale review (although this can be an option in the right circumstances) but it does provide an opportunity for new ideas and a fresh pair of experienced eyes to look at the big picture. It usually involves undertaking an initial financial review to ensure that the organisation’s management information is up to scratch.

An experienced restructuring or turnaround professional should be able to pinpoint, from a charity’s financial information, where problems areas are and provide different strategies for resolving these. Sometimes these can be surprisingly simple, for example: identifying and pruning certain non-core activities or investing in a new technology, thus freeing up staff time to focus on work directly related to a charity’s objectives (or fundraising!).

A restructuring or turnaround specialist can also help with making some of the more difficult, but potentially necessary, strategic decisions. No one likes to consider the idea of redundancies, but sometimes staff cuts are needed to ensure a charity through a short or medium term difficulty with their cash-flow.

2. Ensure your management information is accurate

Management information is quite often where I see organisations, both private and within the third sector, fall down. I can’t stress enough the importance of having accurate information which provides the executive with the information that they need to identify where any problem areas are and use this as the basis for making changes.

Management information is quite simply exactly that: information for management to enable them to make informed decisions about the running of the charity and strategise accordingly. It needs to be varied and tailored to the individual needs of a charity but as a bare minimum should include historic budgeted income and expenditure and the actual results.

A cash-flow forecast is also crucial: a 13 week cash-flow forecast can help identify with enough precision when cash crunches are coming so that plans can be put in place to minimise their impact or to avoid them altogether (preferable but not always possible!).

3. Don’t rely on revenue miraculously increasing

To some extent this links back to tip #2: it’s important not to make budgets unrealistic or expect that things will suddenly return to “normal” and legacies, grants and giving will increase. Chances are that this won’t be the case consistently and it’s best to be realistic about what are the actual prospects for income.

Similarly, whilst new ideas for fundraising and other campaigns should be encouraged and implemented, be realistic about what the likely results of these will be and do not engage on a new campaign if there isn’t clear evidence that this is likely to result in a significant return, particularly as these frequently involve new investment and costs..

4. Speak to your bank and other creditors

It’s surprising how often this doesn’t happen but when financial difficulties are looming, communication really is key. Whilst a common sense approach needs to be taken, as a general rule being open and transparent with your bank and other stakeholders tend to result in greater forbearance and support that may otherwise not be the case.

This aspect usually comes down to trust: if a supplier or bank manager feels like you are being open and they can trust you (and that they can rely on your assurances) then they may be more willing to entertain a payment plan or other arrangement or provide extra funds/extend an overdraft (in the case of a bank or other lender).

An adviser can provide valuable support here. Usually, an adviser can assist with presenting information to a bank or other lender in a way which speaks their language and provides reassurance that steps are being taken to manage and improve the charity’s financial situation.

5. Keep in touch with the Charities Commission

This one should go without saying. The Charity Commission requires trustees to report certain matters to them, including any loss of a charity’s money or assets or harm to a charity’s work or reputation. While short-term cash issues may not need to be reported, any significant financial difficulties should be, particularly if they are affecting a charity’s ability to meet its objectives.

6. Hold regular board meetings

Holding regular board meetings that are appropriately minuted is good practice regardless of the financial shape that a charity is in. However, this becomes even more important when a charity encounters financial difficulties.

Directors of an incorporated charity are still subject to the same duties as their non-charitable counterparts, and wrongful trading should always be at the back of a director’s mind when a charity starts to really struggle. Creating an existing paper trail of the reasons for and timing of a decision is useful for a variety of reasons; if questions of conduct later arise; and as a record that can be referred to whilst everything is still moving. Decisions may need to be reviewed and reconsidered as circumstances change and previous discussions can greatly assist future decisions.

7. Consider your board make-up

That’s not to say you should view this as a golden opportunity to just start removing everyone who you don’t think is quite pulling their weight. However, if you do have directors or trustees coming up to the end of their terms, it’s worth having a real think about the skills and knowledge that the charity and the Board itself needs going forward.

Bringing someone on to the board in the role of a Treasurer who has a strong financial or business background may provide some of the necessary expertise without the expense of an external adviser.

8. Talk to other charities and trustees

Chances are, while the work your charity does and those it helps may be unique, the issues you are facing aren’t. One of the best things you can do is talk to other charities that you know and have relationships with and discuss the issues that you’re facing. It sounds too simple, but sometimes sharing best practice and hearing about how other charities have overcome similar problems can be all that’s needed to spark an idea that works.

9. Lastly, don’t stick your head in the sand

By undertaking all or some of the other steps listed above, you can probably be assured that you aren’t ignoring the problems your charity is facing. If you aren’t, then you really should be trying to meet the problems that your charity is facing head-on: financial issues do not just disappear, especially in the current environment, and the bookshelves of insolvency practitioners are littered with examples of businesses, including charities, that failed because their entirely solvable problems were not dealt with quickly enough. As noted earlier, there can be consequences for ignoring problems or for getting it wrong: wrongful trading laws apply to the directors of incorporated charities, whilst directors of unincorporated charities may also be personally liable for their charity’s debts in the case of insolvency.

We hope that your Charities are successful and that this article will only be of use to a very small number of organisations which do such great work. Hopefully, my list provides some helpful pointers to help get a charity which is experiencing troubles back on its feet.

We have a specialist charity team who can advise on insolvency and restructuring matters. If you require support on this topic please do not hesitate to contact us here.

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