Responding effectively to cost of living pressures
Late last year, the Charity Commission published updated guidance for trustees and charity managers about managing financial difficulties arising from the cost-of-living pressures. With the cost of living crisis not going away anytime soon and with little time for many charities to have recovered from the Covid pandemic, there are several options which are available, and which should be considered, to help decide the future of a charity.
Complying with duties
For charities which are facing difficult financial decisions now, even decisions about their own future, it is important that trustees continue to comply with all of their duties and to make all decisions in the best interests of the charity. Trustees should read the government’s essential guidance for trustees to remind them of their responsibilities. This reminds trustees that when making decisions, they should:
- Act within their powers under the governing document and law.
- Act in the best interests of the charity to carry out its purpose.
- Act with prudence to manage charity resources responsibly.
- Act with reasonable care and skill and take appropriate, specialist advice when needed.
- Manage conflicts of interest.
Trustees who act in breach of their legal duties can be held responsible for any consequences that occur as a result, including any financial loss which the charity incurs. If a trustee themselves is experiencing financial difficulties and is made bankrupt or enters into an Individual Voluntary Arrangement, then they could be disqualified from being a trustee unless they are authorised to continue by the Charity Commission.
As they face these difficult times clearly trustees and charities may need to have some fairly frank and open conversations, but it essential for the long term success of the charity.
Before making any decisions, trustees need to decide if these will be in the best interests of the charity. The Charity Commission has published 15 questions which trustees should ask themselves in the context of finances and resilience to help with decision making.
This will help them to make decisions which balance the risk between the need to cut costs and preserve funds to help beneficiaries in the future and meeting the immediate needs of beneficiaries now.
When making decisions, trustees need to assess risks and during periods of financial difficulty, risks could include:
- The charity’s ability to carry on with financial constraints, whilst safeguarding and protecting beneficiaries from harm.
- Whether it is prudent to sell assets or investments or to borrow against them, to release funds to cover existing expenditure.
There is no guarantee that even after considering all of the facts available at the time that trustees will make the “right” decision. The Commission recognises that things may still go wrong, despite the best efforts of the trustees in acting in the charity’s best interests. It is therefore important to record in detail decision making processes. Trustee and subcommittee meetings should be clearly minuted.
Trustees and charity managers should be evaluating the financial position of the charity and ensuring all trustees have access to real time financial data. Where charities are facing financial shortfalls, there is a greater need to keep all operations and finances under regular review.
The cashflow implications of all decisions should be considered which means: looking at all of the payments that the charity needs to make over various different timescales, what funds are available to meet those payments when they are due and what income the charity expects to receive over the same timeframe. Best and worst case scenarios can help.
Contingency fund
Cashflow forecasting will enable all the trustees to decide if the charity is at a risk of running out of cash and to enable them to plan operations accordingly. New projects, for example, should have a contingency fund built in to cover unexpected costs.
Cashflow forecasting will also help the charity to predict when it is likely to return to “normal” operations and fundraising levels, or if that is not on the horizon, whether options such as merging with another charity or even closing need to be considered.
For charities with temporary cashflow issues, minimising immediate costs is a starting point. Look at where you can stop or put a hold on any non-essential expenditure but take into account any cancellation costs.
There might be other, cheaper ways of operating and where significant cost savings can be made. For example, the use of technology which if just used for hosting meetings reduces both staff time and travel costs. Look at whether staff can be deployed elsewhere and if there are any who want to take a period of unpaid leave or if they would like to reduce their working hours. If staff can be seconded to different operations within the charity, consider the legal implications of this first.
Consider whether it is possible to partner with other charities with similar aims to share facilities, resources or to negotiate cheaper, bulk buying deals, although there may be VAT implications for payments between charities.
Renegotiating loan repayments
If you have any outstanding borrowing, talk to lenders to see if loan repayments can be renegotiated. If you are pausing any charity operations, you will need to consider the contractual obligations which could prevent this or could leave you in breach of terms with further financial repercussions.
Many charities have financial reserves which can be used to help it get through difficult periods. Depending on how those reserves are held, it is important to consider whether this is in the longer term best interests of the charity or if the loss of income, or the loss in value of selling now, negates this.
Many charities also have both restricted and unrestricted funds. Unrestricted funds can be spent by trustees in any way they see fit to achieve the charity’s purpose, but restricted funds, as the name suggests, means they can only be spent in accordance with the restrictions in place.
Charity Commission or donor permission will be needed to change how restricted funds are spent. Trustees will also need their permission to lift restrictions which enable the disposal of designated land or buildings. Charities with a permanent endowment can in certain circumstances consider total return on investment, spend or borrow from them, and there are Charity Commission rules to follow.
Trustees should also look at ways to boost charity income. If the charity has regular funders or donors, consider whether they can be approached to increase their funding. They might be supportive or happy to relax restrictions or agreements they have placed for the use of grants or payments.
Emergency appeals
Charities could also launch an emergency appeal specifically to cover an increase in demand for services. As part of this, look at new or increased grants or loans from other charities or benefactors.
Where a charity has a trading subsidiary, trustees should consider whether this is performing as well as it can. If it is no longer financially viable, trustees need to consider its longer term role in supporting their aims as an income generating activity.
There is practical help from the government with help for fuel costs. This has been extended to non-domestic customers including charities until 31 March 2024, although the level of support has been reduced. Check if your charity is receiving all the support it can and if it is paying the correct amount of VAT on fuel and other purchases.
More collaborative working or a merger could be an option for some charities operating in similar fields, and you can search the register of charities held by the Charity Commission to find potential partners. This often helps charities to use funding or resources more efficiently.
Orderly closure preparations
If, after considering all the options available, the trustees decide that the charity must close, then preparation for an orderly closure to protect the best interests of the charity is advised.
Steps to take include checking the charity’s governing document for any requirements or restrictions on closure. This may also specify a process for closure and how any assets left after costs are to be used.
There will be costs involved with closure such as terminating contracts or leases early, redundancy payments, cost of transferring assets or services to other providers. It will also be necessary to consider how plans are communicated to staff, beneficiaries, donors, partners and wider stakeholders.
If the charity is a company or CIO (Charitable Incorporated Organisation), then there are legal requirements to meet, and advice is available from the Charity Commission about the process to follow. Appointing administrators to help with the closure and who will take over to ensure all the legal mechanisms are followed is also an option in more complex scenarios. Don’t be afraid to ask for advice from professionals.
Reporting serious incidents
Finally, the Charity Commission reminds trustees that serious incidents including issues relating to financial pressures and the associated consequences should be reported.
There is clearly much for charity managers and trustees to think about currently. If you would like advice or support don’t be afraid to reach out and take the advice and support available from a wide variety of sources.
