Thinking imaginatively about your financial position

The coronavirus outbreak has been tough on the charity sector. Its income has been severely dented by weaker fundraising and lower investment income, while expenses have remained largely unchanged. At the same time, many charities have seen greater demands on their services as the crisis has exacerbated a number of health and social problems.

As the dust settles and the post-Covid environment becomes clearer, charities need to assess their financial future and the tools they have available to deal with the crisis. It is not all bad news. Necessity can be the mother of invention and charities are finding new and innovative ways to improve their financial situation. Here are some areas that charities may want to examine:

Understand your position

You may have to make some important and difficult decisions. To do that, you need to understand your position in some detail. Do you have enough up-to-date management information to make decisions effectively? It is important to have this at your fingertips or work with your finance team to get it.

Trustees need to consider the charity’s business plan and decide which elements need to be changed, accelerated or curtailed. Long term ambitions may need to be set aside to provide short term protection. Make sure that every member of your team is focusing on the key priorities.

Be realistic about the likely impact on future income and costs, and work with your finance team or external advisers to reforecast your short to medium term cash flows. Talk to your suppliers, fine tune your buying, examine your day to day costs to understand where the charity has flexibility and where it doesn’t.

Scenario planning

You will also need to do some scenario planning. A number of countries which appeared to have the virus under control are now seeing secondary outbreaks and it is important to consider the impact of a second or third wave. While it may be possible to call on reserves for a relatively short-lived interruption in business, it cannot be an effective strategy over the longer term. Trustees will need to consider the viability of specific projects and spending commitments in different scenarios.

Good cash flow forecasting will be an invaluable tool in this process. In tough times this should be based on modelling on a daily receipts and payments basis and for a six week rolling forward timeframe and thereafter for up to six months to show predicted pinch points when further additional funding may be required. This allows charities to be realistic about their future prospects.

Preserve cash

For a charity trying to preserve its long term viability in the face of unprecedented challenges, cash is king. Even as the economies reopen, charities should be looking to preserve cash where possible to give themselves some flexibility and help them deal with potential future lockdowns. This could mean deferring major payments where possible – including capital spending and taxation liabilities – and negotiating with creditors, such as landlords.

If you have recently committed to acquiring new assets for your charity – vehicles, computers, equipment etc. – can these be put on hold to conserve cash? Remember that cash always takes precedence over short term surpluses.

Consider borrowing

A riskier approach is to take on some borrowing, either from government or banks. This goes against the culture of many charities but may be the only option to stay afloat. At all times, trustees need to be aware how much they are paying to borrow, whether it is competitive and how and when it will be repaid.

Your bank should be considered an essential trading partner, so you will need to keep it on side. Highlight any challenges or the likely need for support as early as possible. Be professional, plan ahead for meetings and ensure that any presentations or proposals are clearly set out, detailed, accurate and realistic.

You will also need to consider your long term strategy to get back on track. It may be possible to organise more flexible borrowing facilities that could accommodate any operational disruption from a second or third wave.

It may also be possible to sell assets – either an investment or property portfolio – but trustees should bear in mind that valuations are still depressed and they may not realise as much as they hope. This should be a last resort and should not compromise the long term goals of the charity.

Harness government support

Many charities will have taken advantage of furloughing and sick pay. The furlough scheme has started to be unwound and is no longer open to new entrants. The Government is also progressively unwinding its support on sick pay and charities will need to ask themselves some tough questions on the future of staff members. If staff do need to be let go, start the process as soon as possible – ideally any furloughed staff would leave before the furlough scheme ends.

There is still government financial support available, even if accessing it is competitive. The Government has pledged £750m to support the charity sector, which includes £200 million for the Coronavirus Community Support Fund. The Office for Civil Society is in charge of allocating the pot.

There is also a range of support options for individual charity types: a £14m Zoos Support Fund, managed by the Department for Environment, Food and Rural Affairs; a Food Charity Grant Scheme, also managed by DEFRA. There is a £30m allocation for domestic abuse charities, plus specific support in other areas including homelessness, mental health, citizens advice, legal advice and vulnerable children.

Business interruption

Charities can also access the Business Interruption Loan Scheme, which gives government-backed and guaranteed loans to support charities and social enterprises with trading revenues. This is designed to support all viable small and large businesses affected by Covid-19, even if they can secure regular commercial financing. However, proving “viability” when the future is so unclear is not easy.

There are also packages put in place by individual sector representatives – the Arts Council England Emergency Response Package, for example, the Historic England Emergency Relief Fund and the Sport England Community Emergency Fund.

Charities need to do their homework to ensure they are not missing out on short term support packages that could make the difference between survival and bankruptcy. It is always worth having a look at the general government schemes available at any given time and seek professional advice if you need further help.

Review your investment policy

Charities’ investment income has also taken a hit during this crisis. Investment income has fallen as companies have cancelled or deferred dividends in order to protect their cashflow in the wake of the Covid-19 outbreak. In aggregate, the dividend income from the UK market could fall by around 40% in 2020.

Charity portfolios will generally fare better because they are not just made up of UK companies or of equities. Many will also include global equities, plus fixed income and alternatives such as infrastructure and real estate. However, it is worth talking to your investment manager to get a sense of how much income might fall and how they are managing through the crisis.

Active management is key for charity investors. Not all companies have been hit equally – the oil majors have been hit hard, while areas such as healthcare and utilities have proved extremely resilient.

Directing an investment portfolio to those areas that are better-placed to weather a dividend storm is a sound strategy amid the current uncertainty. Healthcare and utilities companies yield around 3.5% and over 6% respectively, both little changed from their long term averages. Income investors should also consider looking globally where they can find companies where payouts may be more sustainable.

Above all, diversification is vitally important. This pandemic amply demonstrates how risk can emerge unexpectedly and blindside a portfolio. Diversification – across country, asset class and sector - is a key defence.

Think creatively

This is a new world and calls for big ideas. Trustees will have to be imaginative, at least in the short term. Perhaps the most obvious area is the use of space. Charities will need to examine whether this home-working experiment has changed the way they think about office space: do they need as much? Would capital be better deployed on digitisation and home working solutions? Is it possible to create “pop-up” offices?

There is also the question of what it means for fundraising? Does it finally sound the death-knell for the expensive and inefficient fund-raising tool of shaking buckets in a town square? Captain Tom Moore showed the incredible power of social media and a good story when he raised £32m for the NHS.

Trustees will need to look closely at the cost of raising funds and focus on those areas that give them the greatest bang for their buck. A number of charities have teamed up with their peers with similar missions to share resources and this may be another solution to consider.

When all is gloom

It may look like there is no way out, but sometimes the right advice at the right point can help a charity survive. The new Corporate Insolvency and Governance Bill, currently passing through Parliament, will give charities in financial difficulties more options, protecting them against creditor action and giving them some breathing space to address financial problems. There may be solutions even where the outlook looks extremely gloomy.

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