Charity trustees are being urged to have a better handle on cashflow and the financial position of the organisation as the effects of the cost-of-living crisis prompt concerns about a significant hike in the number of charities in financial distress.
So says Anthony Davidson, a licensed Insolvency Practitioner at McTear Williams & Wood, who warns that an increase in the proportion of charities in financial difficulty is inevitable as a combination of cost and income pressures bite.
With many charities working on an annual basis for donations, most will discover over the next few months whether the regular income they rely so heavily on will come to fruition, Davidson warns. “The first quarter is when most charities budget for the year and in many cases expect to receive most of their donations that should see them through the majority of the year. Any reduction in funding is going to be felt most at this time,” he says.
With mounting UK inflation amplified by the economic effects of the war in Ukraine and soaring energy prices, the charity sector faces a perfect storm just as it begins to emerge from two pandemic-hit years. Many charities are having to cope with a surge in demand, while grappling with declining funding and rising costs.
More than a third of charity leaders say they are concerned that their organisations will struggle to survive in the current climate, according to research published by the Charities Aid Foundation (CAF). Meanwhile, 86% of charities are worried about the impact of the cost of living on beneficiaries and nearly six out of 10 fear people will either stop giving or not start.
To help them weather the storm, accurate financial information is key, as well as access to the right advice Davidson says. “Cash flow is key and budgets in general. If income is grant based, you may have to reapply each year. Do you know, for example, if the grants that you received last year are likely to be available again this year? If there's an expectation that you're going to receive the same income as last year, what is that expectation based on?”
It’s not uncommon for a charity to be overly reliant on one fund donor, only for those donations to disappear. “It highlights the importance of trustees staying involved, having regular meetings and regular access to accurate information, and not just taking at face value the information provided by the managers,” Davidson says.
Charities with financial concerns should get in touch with an insolvency practitioner for advice on turning the organisation around, he urges. “The first thing we'll be interested in overlooking is cash flows, because that will give you a clear timeframe as to how urgent the situation is. And then the conversation is about what steps the charity can take in terms of obvious overheads that can be reduced.”
A dual pronged approach that considers ways to reduce costs and increase efficiencies alongside a focus on boosting income streams is essential, Davidson says.
Scaling back on property overheads is one area where charities can potentially save money, although Davidson warns that many had already done so during the COVID pandemic. Another avenue to explore is freeing up the use of restricted funds, he says. “That's the easiest way to free up cash. Nine times out of ten, our experience has shown that if you have the conversation with the funders and you're transparent about the situation, they are usually willing to allow for funds to become unrestricted.”
The fact that many charity trustees are professionals giving up spare time to volunteer makes the current economic situation particularly challenging. “Even though they might have gone into a role in good faith and with the best intentions, if they take their eye off the ball, they may not meet their fiduciary duties,” Davidson warns.
Trustees have got to understand what's going on financially, they've got to ask difficult questions, and make sure they devote regular time to keeping on top of things. With a fast-changing economic environment, the days of adhoc attendance at quarterly meetings is behind us, Davidson says. “By the time trustees realise there's an issue with the charity, they might ramp up meeting frequency to once or twice a week but by then, the options available to them might be more limited.”
The combination of accurate and up to date financial information, early stress testing of financial information and regular meetings are key to identifying issues before they arise, Davidson adds. “The earlier you're alert to those things, the better.”
Charity Conference 2023
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