From time to time I am happy to publish guest blogs from experts in other areas which can be of help to my client. This particular article by Gavin Bates of Smart Business Recovery is one of the best I have read about Charities under pressure and for me is essential reading for all my charity trustee followers. Both of us have the same philosophy that early action can provide more solutions and I commend the article to you.

We all know that charities are built around purpose. They help people, support communities, fund research, provide care, protect vulnerable groups and deliver services that often matter deeply to those who rely on them. That makes financial pressure doubly difficult to deal with, but the reality of a tough economy need to be addressed.

The value of charities.

There are very human stories behind every charity. Staff care about the work. Volunteers give their time because the cause matters. Trustees often feel a strong personal responsibility. Beneficiaries may depend on the service. Donors may have supported the organisation for years.

We need them to champion the causes that need our awareness and the people that need our help. They exist because good people have empathy for a worthy cause.

However, sadly, empathy does not remove the need for a realistic assessment if things are looking bad financially. A charity may not exist to make private profit, but it must still pay wages, rent, suppliers, utilities, insurance, tax, pension contributions and other operating costs. It still needs enough money to deliver its work safely.

It also needs trustees to understand whether the organisation can meet those commitments.

In short, the reality is still the reality.

If rising costs, falling income, uncertain funding or increasing demand are putting pressure on the organisation, trustees need to face that position early.

Why are charities under so much pressure?

Many charities are currently facing pressure from several directions at once.

To start with as an inevitable result of the economy and other issues, the demand for support is rising. More people are turning to charities for help with poverty, debt, health, housing, family support, care, disability, education and community services.

At the same time, the cost of delivering that help has increased. Staffing costs, energy bills, rent, transport, insurance, compliance, professional services, and 100s of other costs are all rising in the same way they do for any other organisation.

The difficulty is that, unlike a commercial organisation, most charities cannot even simply increase prices to cover those costs as a short term solution. Many services are free to users and funded by grants or contracts that may not rise in line with inflation. Some funding is restricted, meaning it can only be used for a specific project or purpose. That can leave a charity with money allocated for one area while still struggling to cover core running costs in another. We sometimes see a charity looking at insolvency with what is essentially unusable money in the bank.

Key point: A charity can be needed more than ever and still be financially vulnerable. The finances are not going to change because of increased demand in the same way a commercial organisations would.

Charity shops are showing the reality of the pressure

The British Heart Foundation, a familiar bright red store front on the high streets of many towns, is looking to close 150 shops due to financial pressure. That speaks volumes about the reality of being a charitable organisation.

From the outside, a charity shop can look very different from a normal retailer. Much of the stock may be donated. Volunteers may support the operation. The purpose is charitable rather than commercial.

However, the shop still sits in the real world of high street trading.

There may be rent, staffing costs, utilities, insurance, maintenance, logistics, sorting costs, waste disposal, security, card payment costs and other overheads. Footfall matters. Location matters. Changing shopping habits matter. Online selling affects the high street. A shop that once generated a strong surplus may become much less viable if costs rise and income falls.

There is even a competition factor to account for in most town centres where other charity shops compete for the customers.

The end result of all these factors may be a shop that is no longer be generating enough income after costs. At that point the trustees need to ask a difficult question. They need to ask if this activity is still supporting the charity’s purpose, or is it now actually placing pressure on the wider organisation?

That question can feel harsh and difficult. However it is one that needs to be asked for responsible governance.

Key point: Protecting the charity’s mission sometimes means reviewing activities that are no longer financially sustainable. In many cases that may mean making a very hard decision.

The danger of confusing activity with sustainability

One of the biggest risks for charities is confusing being busy with financially stability.

A service may have full demand. A shop may have customers. A project may have strong community support. Staff may be working hard. Volunteers may be committed. Trustees may feel that the charity is too important to fail. However, none of that guarantees financial sustainability.

The real questions are more practical:

• Is the charity generating enough unrestricted income?
• Are core costs being properly covered?
• Are reserves being used faster than planned?
• Are projects fully funded, or are they quietly being subsidised by general funds?
• Are cash flow forecasts showing pressure in the coming weeks or months?
• Are trustees seeing the full financial picture, or only headline income figures?

A charity can look outwardly strong while internally becoming financially fragile.

That is why trustees need clear, current and honest financial information. Not just annual accounts. Not just a budget approved months ago. Not just reassurance that “something will come in soon”. They need to understand cash, commitments, reserves, restricted funds, liabilities and realistic income prospects.

More to the point, and again, with all the sympathy on the world for how difficult this may be to deal with, they need to be realistic about what that means. If, as Auditory Verbal UK recently announced, that means insolvency, then it must be addressed no matter how unpleasant that reality is.

Key point: The most important financial information is often not what happened last year, but what is likely to happen next month. Charitable organisations operating in a volatile market like the current one need to be vigilant and agile and always ready to respond if things look bad.

Warning signs trustees should not ignore

Financial problems rarely appear from nowhere.

In our experience of dealing with charities, CiCs and Societies and other third sector organisations, trustees should pay close attention if any of the following are happening:

• reserves are being used to cover normal day-to-day running costs
• unrestricted funds are becoming tight
• suppliers, landlords, HMRC or pension payments are being delayed
• management accounts are late, unclear or not discussed properly
• projects are continuing even though funding has reduced or ended
• restricted funds are not available to cover rising general costs
• staffing costs are rising faster than income
• fundraising is taking longer or delivering less than expected
• shops, services or projects are busy but not producing a surplus
• the charity has no reliable cash flow forecast
• the organisation is repeatedly saying, “We just need to get through the next few months”

None of these signs automatically means the charity is insolvent, but they do mean trustees should stop, review and take advice if needed.

The worst response is to carry on and ignore these issues, or they could well develop into an insolvency situation very quickly.

Key point: Early warning signs are not a reason to panic but they are a reason to act. Review, assess, run realistic cash flow scenarios and if they are pointing in the wrong direction, you should respond by taking appropriate action and advice.

What should trustees be asking?

When financial pressure starts to build, trustees should be asking clear and direct questions about the finances. Trustees do not need to have all the answers, but they do need to make sure the right questions are asked, the right information is available and the right advice is taken when the situation becomes serious.

Part of the role of the trustee is to be professional enough to put aside the emotional element and focus on the real situation then act accordingly. It doesn’t mean you want to be the voice of doom, but it does mean you have a responsibility to be the voice of reason.

Key point: Good governance is not about hoping the numbers improve. It is about knowing what the numbers mean.

When should a charity seek advice?

A charity should seek advice, preferably from a charity insolvency specialist, when the financial position is deteriorating significantly.

It is much better to ask for advice when there are still options available. That advice might help the charity review costs, restructure, renegotiate commitments, manage creditors, consider mergers, close loss-making activities, reduce services, plan an orderly closure or understand whether insolvency procedures may be required.

The legal structure of the charity also matters. A charitable company, Charitable Incorporated Organisation, trust or unincorporated association can all bring different responsibilities and risks. Trustees should not assume that the same rules apply in every situation.

Key point: If insolvency is a possibility, professional advice should be taken as early as possible. Taking advice does not mean the charity has failed. It means trustees are taking their responsibilities seriously.