New guidance from the Charity Commission emphasises the importance for charities of cash flow management, reducing costs, frequent monitoring of finances, and creating plans.
In light of concerns that many charities are struggling financially due to coronavirus, the Commission has published some helpful guidance giving a starting point to help charities, especially smaller charities, navigate these difficult times.
It also signposts other organisations that charities may be able to turn to for further advice and support.
Act in the best interests of the charity
Unsurprisingly, the overarching theme is that Trustees must make the decisions that are in the best interests of the charity.
The guidance accepts that there are many hard decisions for Trustees to make during this crisis, that there may not always be a “right” decision, and charities will be exposed to greater levels of risk.
It also, however, emphasises that Trustees will generally be protected from personal liability provided they have “carefully applied [their] skills and experience to decisions and taken advice when needed”.
The key takeaways from the Commission’s suggested steps
The new guidance seeks to summarise the more in-depth Commission guidance on managing a charity’s finances when a charity is in financial difficulty, and suggests a series of steps for Trustees to work through, as follows:
1. Review the charity’s finances and operations
Trustees should focus in particular on forming an accurate picture of the charity’s cash-flow projections, so that any potential shortfalls can be identified in advance. These projections should then be regularly monitored and updated.
2. Reduce costs where possible
Cost savings may be achieved by internal changes (e.g. stopping services, re-allocating staff, reducing non-essential costs) and external changes (collaboration with other charities). Trustees should consider whether any of the charity’s staff can be furloughed.
3. Maintain / increase income
Protecting income will be critical to all charities. Trustees should:
- maintain an open dialogue with funders;
- review the charity’s finances for additional sources of funds, including considering the use of designated funds, reserves, restricted funds and permanently endowed assets – but Trustees should be aware that accessing some such funds may require need legal advice or Commission consent; and
- consider the emergency raising of funds by means of grants or loans.
The guidance also accepts that it may be in the best interests of some charities to sell investments to fund urgent needs, even if now is not the best time to sell.
4. Worst case scenario planning
If Trustees believe that it may be necessary for their charity to close, they should try to identify the following as part of their review of finances and operations:
- when a cash shortfall is likely to occur
- what should trigger the development of plans to close and
- who will be responsible for developing those plans
What to do if the worst does come to the worst
If, while keeping the finances and the operations of the charity under review it becomes apparent either that the scale of financial loss threatens the charity’s ability to operate, or that the charity’s financial reserves or other methods are insufficient to cover the charity’s losses, the Trustees should submit a serious incident report to the Commission.
If the Trustees come to the conclusion that it is in the best interests of the charity to close, they will need to plan for this, taking into account:
- the governing document’s provisions and restrictions regarding closure
- whether the charity holds permanent endowment, and what must happen to this after closure
- the costs of closure
- communications with beneficiaries and supporters
- the need for legal advice, in particular for charitable companies and CIOs and
- whether an administrator should be appointed.
Overall, it seems that Trustees of charities facing financial pressures as a result of the coronavirus should, however, be able to take some comfort from this new guidance, which suggests the Commission is understanding and sympathetic of their current difficulties.
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