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Guidance for trustees facing challenging times

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The Charity Commission has published guidance for trustees, especially those acting for smaller charities, who may need help facing difficult situations or decisions.  We have summarised the Charity Commission’s key considerations and some practical steps below, which we hope will help alleviate trustee’s concerns at this extremely challenging time.

Always consider the best interests of the charity?

In deciding how to proceed as a trustee your starting point is always to consider what is in the charity’s best interests. There are likely to be a number of factors that you will need to take into account to judge this, including the trade-off between:

  1. reducing costs in order to be there to support beneficiaries in future; and
  2. meeting the immediate needs of the charity’s beneficiaries with the possibility that in future the charity will have to reduce its services or close entirely.

Are you able to safeguard your users and protect them from harm as the charity goes through potentially significant change?

If you decide to sell investments and other assets at this time, you may raise significantly less money from their sale than you would expect in more normal times. This may be in the charity’s interests - for example, it may be the best option available for meeting urgent needs or helping the charity to survive - but you should have clear reasons to support the decision.  Borrowing against assets may be an alternative.

Are the decisions you are making in line with your charity’s purposes and any requirements in your charity’s governing document?

If they involve lifting restrictions on assets or disposals of land, have you checked if the Charity Commission’s permission is needed? As trustees you will generally be protected when you have carefully applied your skills and experience to decisions and taken advice when needed. The Commission recognises that these decisions will often be difficult, that there may not be an obvious ‘right’ decision, and that charities will be exposed to higher levels of risk than in more normal times. The Commission also recognises and will take account of the fact that things may go wrong despite the best efforts of trustees to act in their charity’s best interests.

By working through the following suggested steps, you will gain an understanding as to your charity’s financial position, and be in a position to be able to make informed and sensible decisions.

Step 1: Consider your current financial situation

It is important to make sure you have as accurate a picture as possible of the current and immediate future operations and their financial implications on the charity. This will help you to identify the urgency of any actions and the time you have available to develop and implement a plan to respond to the financial pressures.

Try to create a realistic cashflow forecast and identify:

  • All the payments the charity will have to make over a range of different timescales.
  • What cash is currently available to cover payments as they fall due.
  • What income the charity realistically expects to receive over the same timescales based on a best estimate.

This should enable you to identify whether the charity is at risk of running out of the cash it needs and when that shortfall will happen. Shortfalls of income are likely to be quite common for charities at this time: identifying when it is likely to happen is key to enabling you to exercise your judgement as trustees in assessing how to help your charity continue in the short term and recover in the longer term.  

Step 2: Options for minimising costs and protecting and increasing income

If your charity will continue to operate, consider if it is possible to:

  • Identify and stop or put on hold on non-essential outgoings, taking account of any cancellation costs.
  • Find alternative, cheaper ways of operating through, for example, use of technology or other efficiencies.
  • Team up with other charities with similar aims to share facilities or resources or negotiate cheaper deals.
  • Re-allocate staff to the priority tasks relevant to surviving the financial challenges.

Alternatively, it may be feasible to reduce the charity’s services or put it into ‘hibernation’ for a fixed period in order to reduce the charity’s costs. For example:

  • Cancelling contracts where costs currently outweigh benefits. Check if there are any penalty charges and whether there is any option of waiving these.
  • Using the Government’s job retention scheme will cover the cost of 80% of the salaries of any staff who will not be needed to deliver services.

Whatever level of activity you decide on, other options for reducing costs include:

  • Applying for any other Government schemes that will help you reduce, spread or delay payments such as business rates or VAT.
  • Reducing immediate borrowing costs by rescheduling loan repayments over a longer timescale.
  • Are you able to raise funds from an emergency appeal to your supporters or in new ways?
  • Are you able to seek new or increased grants or loans at low or no interest, including from other charities or benefactors?
  • Consider if there are short term commercial partnerships you could make with local businesses.
  • Can you bring designated funds (money that is earmarked for a purpose but not formally restricted) back into general use?
  • Do you have reserves, or could you use restricted funds?
  • Consider accessing permanent endowment assets, although you may need Charity Commission agreement.

Step 3: Keep the charity’s operations and finances under regular review and take any additional actions

Throughout the current crisis - and beyond - robust, frequent monitoring and review will help you manage your finances and assist you in deciding if you can continue to deliver your charitable activities.

Where possible, continue to maintain the cashflow forecast described in step 1 so that you have an up-to-date forward-looking view of when money will be received and spent.

Whilst it may be difficult to forecast and budget in the current climate it is this monitoring that will help you manage the situation. It is also helpful to plan for when you might either:

  • be able to move the charity to recovery and a return to a more normal operating environment and what will indicate that this is achievable, or
  • need to consider closing the charity and the trigger points that will indicate this. To support this decision, it is helpful to have an understanding of the likely costs of closure. The Government has outlined some proposed relaxations for companies to insolvency law and directors of charitable companies should take advice on how this may affect a decision to close.

You should report a ‘serious incident’ to the Commission when your assessment reveals that either:

  • the scale of financial loss threatens the charity’s ability to operate and serve its beneficiaries, or
  • the charity’s financial reserves or other measures are not sufficient to cover the losses.

If you decide that closure is necessary, prepare for an orderly closure and focus on the following key areas to protect the charity’s best interests:

  • Check the charity’s governing document for any requirements and restrictions covering closure. It may specify the process for closure and how any assets left after costs are to be used. If a charity holds any permanent endowment – assets that have to be preserved – you may need to transfer it to another charity.
  • Decide on the type of closure. In addition to complete closure and cessation of the charity’s activities, it may be possible to merge with or transfer to another charity – financial crisis does not prevent this.
  • Build a picture of these costs: they could include unavoidable contract and leasing costs, redundancy payments, costs of transferring assets, or services or parts of a service to other providers. Gather this information, if possible while the charity is a going concern, so that you can use it to help you identify the point at which you must decide to cease operations and close the charity.
  • Consider appointing administrators who will take over and ensure that all the appropriate legal mechanisms are followed.

You should take professional or expert advice if you are concerned about financial solvency or decide to close, particularly if your charity is a company or a community interest organisation  because there are clear legal requirements to meet.

If you have any questions please contact Julia Seary, Head of our Charity team.

 

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