For charities, having a sound financial base to work from ensures you are better equipped to carry out your purposes and assist your beneficiaries. However, financial difficulties can occur for a multitude of reasons, some of which are unforeseeable and uncontrollable.
Should your charitable organisation fall into financial problems, such as a reduction (or even total stop) of your funding, it’s essential you know what to do so you can act quickly.
An indication of whether you are in trouble financially might be a:
- Limited amount of cash
- Tight cashflow forecast
- Weak balance sheet, with high liabilities compared to assets
This article provides some guidance on how to avoid these situations and what you might do if you cannot…
1. Awareness
Trustees must be aware of their charity’s finances, even if there’s someone specific leading on these aspects. All should have access to clear, current and accurate financial information, which should be regularly discussed at meetings.
This is part of their duty to manage resources responsibly, acting in the best interests of their beneficiaries and the organisation, with care and skill. This involves:
- Protecting your charity’s money; and only spend this money on your purposes
- Ensuring there’s enough money to carry out your activities and pay liabilities
- Identifying financial difficulties and promptly deciding what to do about them
- Complying with, and staying abreast of, the rules and regulations
- Seeking early professional advice, if necessary
2. Prevention
To avoid the chance of your charity reaching an adverse financial position, you should prioritise the following actions:
- Establish sound financial controls
- Scrutinise your budgets and business plans
- Review charity reserves and your reserves policy
- Assess your charity’s cash position; make a cashflow forecast
- Identify any potential risks to your finances
Your charity should obtain external advice before making any significant financial commitments (such as borrowing money). For unincorporated charities, this is particularly important, as trustees can be personally liable for their decisions. Keep a record of any advice you receive, as well as your reasoning for the actions you take.
Read the government’s guidance on what questions trustees should be asking to best manage their charity’s resources.
Charity Finance Group also offers useful information on how to manage money effectively.
3. Action
If you have deemed that your charity is experiencing financial problems, you will need to consider:
- How to raise further funds (see below)
- How to reduce costs
- What services to your beneficiaries might be affected
- What the future of the charity may look
Depending on the circumstances, you might consider seeking the input of your beneficiaries. In these difficult scenarios, it’s always best to be transparent with your staff, volunteers and beneficiaries, so they can understand any changes that take place and if they can provide additional insights in any way.
Would collaborating or merging with another charity with similar purposes to share facilities or resources be appropriate?
Potential options to raise additional funds could include:
- Launch a fundraising appeal
- Apply for grants from foundations
- Discuss with existing funders
- Negotiate with lenders for more favourable terms
- Ask supporters to increase their regular, or make a one-off, donation
- Talk to your bank about the situation
In some cases, you can assess your charity’s existing assets to see if it’s possible to free-up any necessary funds. This could involve:
- Changing your plans for general funds or assets (which are not subject to restrictions) that had been intended for other projects
- Dipping into your charity reserves
- Using legal powers to remove restrictions on a permanent endowment, designated land or special trust funds
- Selling charity assets (land, property, etc.)
Always check your governing document to confirm if you are acting in line with the relevant rules.
Worst case scenario
Your charity may be insolvent if it cannot pay its debts or have enough assets to cover its liabilities. If this reflects your situation, read government information for charities or companies/CIOs facing insolvency.
Should you decide that your charity can no longer function with the finances available, you will have to close the organisation and inform the Charity Commission, so you are removed from the register.
Explore all available and responsible options before you reach this conclusion.
Need some guidance?
Dealing with money may not be an activity your feel confident with.
Burton Sweet has a longstanding commitment to charities and civil society organisations, offering practical, professional and passionate support. We want to assist you, so you can deliver effectively for the communities you serve and show the good you do.
If you want some help managing your charity’s finances, please contact us and a member of our team will be happy to assist you.
