Tue 28 February 2023
In recognition of the difficult circumstances in which many charities are finding themselves, namely as a result of rapidly increasing costs, the Charity Commission has recently released new guidance on how to manage financial difficulties.
The guidance, which is aimed at all Trustees and especially those of smaller charities, first reminds Trustees of their duties to provide effective financial stewardship and to ensure that decisions are made in the best interest of the charity and are legally sound.
Acting in a charity’s best interest during challenging economic environments requires finding a balance between reducing costs now in order to be able to preserve funds to support beneficiaries in the future, and meeting the immediate needs of the charity’s present beneficiaries with the possibility that in the future the charity will have to reduce its services or close entirely.
The guidance recommends having open communication with beneficiaries, supporters, staff and volunteers to help find this balance. Assessing the risks that arise from making often difficult decisions is also considered vital during periods of financial distress. In doing so Trustees should consider:
The majority of the guidance is focused on the considerations and practical steps which can be taken if a charity finds itself in serious financial difficulty. It stresses the importance of cash flow and whether costs can be minimised and income maximised:
Including stopping non-essential outgoings, reallocating staff or even pausing some of the charity’s activities.
To see whether any can be released such as seeking Charity Commission authority to change how restricted funds can be expended.
Drawing upon regular funders and donors or running emergency appeals could secure much-needed additional income.
Charities with a non-charitable trading subsidiary in financial difficulty may need to decide if the charity can justify temporarily supporting the subsidiary.
As well as utilising Government Schemes, charities should ensure they are paying the correct rate of VAT on its fuel purchases.
Considering the option of mergers or collaborative working
A more creative way of dealing with financial difficulties, mergers and collaborative working has its own.
Seeking external financial support and guidance From the likes of NCVO, Institute of Fundraising and the Charity Finance Group.
The guidance also recognises that, in a minority of cases, financial difficulties may result in a charity’s Trustees deciding that closure of the charity is necessary. The guidance sets out the steps to follow to prepare and execute an orderly closure of a charity.
You can find the full publication here.