In response to the serious financial difficulties that many charities are facing, the Charity Commission has released new guidance for trustees in making decisions regarding finances. The guidance aims to give small charities in particular a framework to apply when navigating difficult decisions.
The guidance sets out the following steps to follow:
- The starting point should always be the best interests of the charity. The Commission acknowledges that in current circumstances for many charities making a decision on what is in the best interests will involve a trade-off between reducing costs in the hope of being able to provide services in the future, against meeting the current needs of beneficiaries. The guidance also notes that a charity may receive significantly less money now on the sale of investments and assets as compared to normal times, however this may still be the best option for the charity in order to help meet urgent needs, or even survive.
- Get a clear picture of the current financial situation of the charity, by knowing what the financial implications of current and future operations will be. Focus on cash flow management by assessing payments due in a timescale against the cash available to cover them and the income the charity can realistically expect to receive in the same period. Identifying shortfalls is key to understanding what actions to take in the short and long term.
In order to help maintain vital cash flow, consider options to minimise costs and maximise income. Suggestions offered for cutting costs include: teaming up with other charities to share resources or negotiate cheaper deals (although advice on VAT may be needed); reducing the charity's services for a fixed period if feasible; and making use of the Coronavirus Job Retention Scheme and other applicable business support.
To improve sources of income the guidance suggests considering: if it would be possible to raise money with an emergency appeal; assess whether there are designated funds which could be made available for general use; consider using reserves, which may mean that other projects will need to be cancelled or deferred; and talk to funders about the charity's situation to find out if they can help by bringing forward payments or relaxing condition.
The guidance also mentions accessing permanent endowment assets if the charity has them. This option would likely require advice as the agreement of the Charity Commission may be needed.
- Maintain frequent monitoring and review of operations and finances throughout the crisis. This will help to identify if the charity needs to consider closing. The guidance notes that it is helpful to have an understanding of the costs of closure, and charitable companies should take advice on insolvency during the current crisis as the government has proposed certain relaxations to insolvency law.
A serious incident should be reported either when financial losses have reached a point where the charity's ability to operate is threatened, or the charity is not able to cover the losses.
The guidance also sets out what to do if closure is necessary. If the charity makes the decision to close due to insolvency or financial issues a serious incident report will also be required, but not if the charity chooses to close for other reasons.
The guidance states "As trustees you will generally be protected when you have carefully applied your skills and experience to decisions and taken advice when needed". This protection is always available to trustees, however it is worth restating as many trustees will be making difficult decisions.
The guidance also signposts various other organisations that provide financial resources and help for charities during the coronavirus outbreak.