3 steps to managing financial difficulties in your charity
The unprecedented nature of the coronavirus pandemic has caused financial difficulties for many charities. With this in mind the Charity Commission has recently published guidance to assist charity trustees in working through these challenging times.
The overarching message is that trustees must act in the best interests of the charity, and act and plan proactively. The Charity Commission recommends following three steps to help in understanding the charity’s current financial position, planning for the future and decision-making.
Step 1: Consider the current financial situation
- Obtain a clear understanding of current operations and assess the financial implications of these operations with a focus on cash flow management.
- Create a basic cash flow forecast by identifying payments and expected income over a range of different timescales (2 weeks / a month / 3 months etc).
- Use the cash flow forecast to identify when shortfalls will happen and when the charity is at risk of running out of cash. This enables trustees to identify what action may be required to help the charity to continue in the short term and recover in the long term.
Step 2: Minimise costs and protecting and increasing income
- Review costs and assess whether they can be reduced. This could be done by putting on hold non-essential outgoings, finding cheaper alternatives, working with other charities, rescheduling loan payments, cancelling contracts or using the government’s Job Retention Scheme.
- Conserve income by speaking to funders and seeing if they can help in relaxing restrictions of income or bringing forward payments. Also consider bringing back designated funds for general use or using the charity’s reserves.
- Increase income, such as by having an emergency appeal, seeking new or increased grants or obtaining a loan on low interest rates.
Step 3: Keep operations and finances under regular review and take any additional actions
- Frequently monitor and review finances to help decide if the charity can continue to deliver its charitable activities.
- Maintain the cash flow forecast on a regular basis to assist with the making and timing of decisions.
- If the scale of losses or level of reserves means the charity’s ability to operate is threatened, then this must be reported to the Charity Commission as a ‘serious incident’.
- If it is decided that closure of the charity is necessary then prepare for an orderly closure by assessing the type and cost of closure, communicating with the Charity Commission and beneficiaries, and obtaining professional advice.
The steps outlined above will help to ensure trustees have an accurate assessment of the current situation facing the charity and to assist in making better informed decisions about the future. Click here to read the full Charity Commission guidance.
At MHA Carpenter Box we can assist with the preparation or review of cash flow forecasts. Should the worst case scenario arise, we can also advise and assist with the process of closing a charity.