Navigating uncertainty in the Not for Profit sector

When the economy enters a downturn or is faced with uncertainty, not-for-profit businesses can feel the impact more immediately than some other sectors.

Charities may see a reduction in donations or changes to longer term funding agreements. The impact of this may come with very little notice and Trustees must be mindful of how the Charity would cope if funding were withdrawn or not renewed at short notice.

The purpose of this article is to assist Trustees in considering what steps might be taken to mitigate these risks and ensure their business is in the best position to come through difficult periods.

A typical scenario

Many trustees may recognise the following scenario:

• A prolonged period of operating difficulties has diminished reserves; 
• Reliance on key sources of funding and no back-up plan if those sources stopped; 
• Indications from the management team that cash flow is positive, but the forecasts are optimistic in terms of future funding; 
• Perhaps the Charity owns some investment assets, but there is no clear strategy on how these might be sold if additional cash was required; 
• The Trustees have been meeting quarterly but there is concern that more frequent meetings may be required.

Trustees must consider whether they have enough information to make informed decisions quickly in the event a major downturn, for example if a key source of funding isn’t renewed.

Role of trustees and risks

Trustees are ultimately responsible for the Charity and must ensure that they are aware of the risks that can come along with continuing to operate.

If a Charity does eventually go into Liquidation, the Liquidators will consider the question of whether at some point prior to the Liquidation, the Trustees knew or ought to have concluded that there was no reasonable prospect of the Charity avoiding Liquidation.

If the Liquidator concludes that they should have ceased operating then the Trustees could potentially face claims against them personally, in relation to losses suffered in the meantime.

What can be done to mitigate risks

Trustees should be mindful that decisions taken when a Charity is facing difficulties may later be subject to challenge. That is not to say that they should just decide to close the Charity at the first sign of trouble.  In most cases, there will be compelling reasons why the Trustees believe that the situation can be recovered. The key thing is to discuss those reasons and record the outcome.

• Be comfortable with the financial information being provided by the management team and ensure that all Trustees understand the information presented; 
• Be clear what assumptions are being relied on and why the Trustees think they are reasonable;  
• Note down any objections / challenges / dissenting voices;  
• Record actions taken to make the assumptions more robust;  
• Record what professional advice is taken;  
• Include the forecasts which are derived from the reasonable assumptions.

What can we do to help

We have a sizeable portfolio of over 700 clients in the not-for-profit sector.  These clients cover a wide spectrum encompassing large grant making charities, schools and charities with objectives of the provision of care to name a few.  We have considerable experiences in assisting Charities in all stages of growth and occasional decline.

Where future operations are uncertain, we are able to prepare robust forecasts modelling different scenarios and assumptions, and we have presented these to boards of Trustees to allow them to make informed and confident decisions about future operations.

Where there is a need, we also have the expertise and contacts to assist Trustees in considering asset disposal strategies and potential mergers or transfers of services.  We can also provide clear advice to Trustees about their obligations and risks where there is uncertainty over continued operations.

Our main aim in these situations is to support Trustees in overcoming difficult situations, allowing Charities to return to profitability without exposing Trustees to risk in the meantime. If you would like assistance from one of our experts, please do get in touch.