Recently Peter Gotham (Gotham Consulting Ltd and specialist in support to the charity sector) gave a webinar for charities, particularly Councils for Voluntary Service and community accountants, on how to support organisations in financial distress. This blog is based on the presentation given and the discussion at the webinar.
Sadly, it is becoming more regular for charities to reach out to local infrastructure bodies with concerns about their financial sustainability. Charities are increasingly engaged in commercial activities, whether that is delivering contracted services or carrying out trading activities to raise funds. Charities are also operating in the midst of a very challenging financial situation, where funds are being cut from local councils and fundraising is more competitive than ever.
What is the status of an advisor?
If you are working with organisations, it is important to understand what your role is as a potential advisor. If you are passing the details of the charity on to a professional, then you probably don’t need to worry.
However if you are giving support to a charity that is facing insolvency, then you need to consider whether the support that you are giving creates the risk that you may become a ‘Shadow Director’. This is someone “with whose instructions the directors are accustomed to act”. The risk is that you become bound by the same legal duties and obligations are other directors, such as trustees or management team. Because you may not have known that you were a shadow director, you may also not be covered by any insurance of other directors. It is important to make sure, therefore, when you give any advice that you are clarifying your status as an advisor. If trustees or managers want you to become a formal director to help with financial distress, then that should be clarified at the beginning.
How do you spot financial distress?
There are a number of ways that you can spot financial distress.
An obvious is whether the charity is facing a severe cash flow problem and is unable to pay debts as they fall due. Charities should be encouraged to spell out their cash flow position as early as possible in any conversation about financial distress.
It is important to take account of restricted funds. If there is insufficient cash to fund the these commitments that is cause for concern.
Another area of concern may be if liabilities (such as pension costs) grow larger than the assets at the disposal of the charity. Although this definition is not regularly used, as most companies will begin their lives with more liabilities than they have assets, it may be a useful way of considering the future sustainability of the charity.
It is also important to get a proper understanding of the income and costs of the charity. If income is volatile but costs are relatively fixed, this could indicate potential difficulties ahead.
What should you do if there is a risk of insolvency?
The important thing is to begin the conversation as early as possible as there may be things that could be done to save the charity. This may involve talking with funders about potential support. It may also be about cost savings that could be made. It may also be possible for the charity to identify potential partners who could help run services or take over projects should the worse happen.
When in difficulties relationships are key to survival, or a managed transition. Funders, suppliers and bankers can assist in giving the charity time to develop and agree a plan. However the key relationships are generally those between trustees, staff and volunteers. A mutually supportive team with a good understanding of the figures and projects, and a willingness address the issues, can work wonders.
If, however, insolvent closure seems likely the most important thing is to make sure organisations take professional advice. You can contact Charity Finance Group if you are unsure where you can seek such advice.
You must also make sure that charities do not show any “preference” to some creditors over others. For example, paying friends or family over other organisations or perhaps paying a small local supplier over a big national company. This is illegal, unless commercially justified.
An important way that you can help is advising the charity to gather documentation on its decision making and ensuring that it codifies its actions. This will help in any potential legal issues that may emerge later.
Where can I find help?
As we have mentioned, Charity Finance Group can help in identifying firms or advisors that can assist you. For example, we have a financial difficulty/insolvency helpline which may be of use to you. You can also use other umbrella bodies such as NCVO or ACEVO.
Locality also a useful piece of guidance called “Early Warning Guide” which uses a traffic light system to help you assess whether your charity is in potential distress.
You can also ask other charities for advice, particularly if they work in the same field as the charity that is in distress. Funders can also be a source of support, not just in financial terms, but also in terms of finding advice or guidance.