Improving Your Charity’s Finances

The Charity Commission has recently updated its guidance for trustees who are seeking to improve a Charity’s finances, or who are concerned that their charity might be in danger of being unable to pay its debts.  

This guidance has been updated as of 23 September 2024 to make it more accessible and easier to use, and can be found here. 

The purpose of this article is to provide a brief overview of this updated guidance and how we can support your charity to overcome adversity that it may be facing.   

We understand that the current conditions in the economy are bringing various challenges to charities such as decreasing donations and funding paired with an increase in demand for services, and rising operational costs. 

Improving your charity’s finances 

The guidance reminds trustees of the importance of regularly monitoring the charity’s finances in order to ensure: 

• The charity’s funds and any restricted funds are used correctly; 

• The charity has sufficient funds to meet liabilities, and any difficulties are identified at an early stage; 

• If advice or remedial action is required, then it can be actioned at an early stage. 

Managing the finances might include reviewing cash forecasts and budgets; ensuring financial controls are in place; managing known financial risks; seeking advice before making significant financial commitments; and reviewing the reserves policy. 

The guidance then suggests options which trustees may have where the charity is struggling financially but has not yet reached the point of insolvency.  Insolvent means either that the charity cannot meet its liabilities as they fall due, or that the liabilities of the charity outweigh the assets. Options include: 

• Minimising costs; 

• Looking for additional sources of income; 

• Reviewing the charity’s funds and assets. 

Once these matters have been considered, trustees will be able to make an informed decision as to whether to continue trading.  

If the charity’s operations have become unsustainable, trustees could look to potentially seek to merge with another charity or, if the situation cannot be improved, close the charity. 

What if the charity is insolvent

The guidance also provides an overview of the options available to trustees if they find that the charity is in fact insolvent.  

The overriding message is that advice from a licenced Insolvency Practitioner should be sought at the earliest possible stage in order that steps can be taken to minimise the impact on creditors and the individuals that use the charity’s services. 

How Kreston Reeves can help

We are a full-service firm with experience supporting charities and their trustees when facing a wide range of difficulties, from preparing cashflow forecasts at one end of the scale, right through to managing closures where debts cannot be paid in full. 

We understand that dealing with charities will give rise to challenges which may not be present when looking at commercial businesses.  

Role of the trustees

Trustees tend to be keenly aware of the need to take the right steps at the right time but will also be passionate about the aims of the charity and may struggle with decisions which impact the very people the charity is looking to support. 

Role of management

The individuals managing a charity may be employees who will also be impacted if the charity is struggling. We recognise the importance of maintaining engagement especially where are charity is being wound down. 

Communications

Charities will often deal with vulnerable or young individuals and there will often be a high degree of sensitivity regarding the sharing of bad news. We work with trustees to ensure that every reasonable step is taken to ensure that all impacted individuals are notified of the situation at the earliest stage. 

Charity case studies

We recently supported a charity in the education sector which overcame cash flow issues by transitioning from an asset-holding model to a more sustainable model where its assets had been sold. We supported the trustees in discussions with the bank and also advised on their fiduciary duties and governance when cashflow had become a real problem. 

We also supported an unincorporated charity which supported young people. A formal procedure was not available as the charity was unincorporated.  We worked with the trustees and other stakeholders to implement a transparent and fair wind down plan which alleviated pressure from the trustees and ensured that recoveries could be made in a managed way for the benefit of those owed money by the charity. 

We would encourage trustees to review the updates to the Government’s guidance. If this gives rise to any queries or uncertainties, then please do get in contact with us as we may be able to help address any issues at an early stage and avoid bigger problems arising in the future.