• 10 Apr 2024
• •
• 3 min read

How to manage a charity through financial distress

Anyone currently running a charity will understand that the post-pandemic environment combined with geopolitical events of recent times, have left charities feeling the pressure in terms of managing its finances.  If you are a charity trustee or involved in making decisions for a charity, it is often difficult to know how to navigate through these times, which have presented complex financial issues.

Charities just like any other businesses have been impacted by rising expenditure as well as reduced income.  These factors have hit harder against a backdrop of withdrawal of government grants and funding and also reduced public donations. This is compounded by an increase in the demand for certain charities’ services, where many government agencies are struggling to support the needs of the public. 

Many charity trustees are facing an impossible balancing act in seeking to maintain viability for the benefit of those they serve, whilst at the same time protecting the interests of creditors.  Even an economically robust charity will not be immune from a particular event or change of circumstances which could immediately set the charity off-track financially.

There can be no template for trading a charity through challenging times, whether that be driven by economic or circumstantial factors. Now more than any time before, charity trustees have to be increasingly mindful of their duties and responsibilities.  The consequences of not managing such issues and adapting strategies, could not only prejudice those that the charity serves to benefit but in certain situations, there could be potential personal liability implications.

The importance of identifying the technical point that a charity becomes insolvent, is often overlooked by charity decision-makers.  From the point that the charity is identified as insolvent (or ought to have been identified), the charity trustees’ duties must immediately shift away from beneficiaries to only acting in the interests of the charity’s creditors as a whole.

Charity managers must be alert to financial vulnerabilities that could tip the charity into insolvency either by virtue of it having run out of cash to pay its debts as they fall due (cash flow insolvency) and (or) the charity’s assets being worth less than its liabilities (balance sheet insolvency).  A charity operating within these parameters does not necessarily have to stop trading or be liquidated but there must be a shift in the manner in which decisions are reached.  The charity must however only continue trading if there is a proper rationale that this is in the interests of the charity’s creditors (as a whole) and there is to be no worsening of the overall financial position. All creditors of the charity must then be put on an equal footing and none treated more preferentially than others.  There will also be restrictions around the application of funds, particularly reserved funds. 

This conscientious decision-making should be reached with the benefit of appropriate advice from accountancy and legal insolvency specialists (insolvency practitioners and restructuring lawyers).  Making the wrong call could give rise to the trustees’ conduct being reviewed and claims brought against them personally, if the charity subsequently has to enter a formal insolvency process.  Lack of understanding or awareness of responsibilities or failing to take proper advice early enough (for whatever reason) would not afford a defence for charity decision-makers.  It is incumbent upon trustees to do the right thing and obtain advice from specialists to protect themselves as much as maximising the prospect of trading back through to solvency for the benefit of creditors and beneficiaries.

Many charity trustees often hold back on taking advice at the early warning signs, out of fear or concern that the advisors will encourage them into a terminal insolvency procedure which will mark the end the charity.  Early engagement will usually only serve to promote rescue opportunities and lead to effective strategies to set the charity back into solvency (e.g. through diversification, innovation, debt restructuring or even a merger). Seeking input at the right time will be key to maximising the options for recovery.

If you are a charity trustee or involved in a management team that deals with decision-making for a charity, please sign up to our free webinar on Tuesday 16 April.  The session will be of interest to those seeking awareness of the early warning signs of financial distress, whether now or in the future. We will cover management strategies and examples of different insolvency procedures to build up your awareness and preparedness should you ever be faced with these challenges in your role. 

Click here to register for our webinar on 16 April.