The high profile closure of Kids Company has turned the spotlight on a range of key issues for charities, including funding, financial stability and governance.
The registered charity, which provided services that reached thousands of children, young people and families through operations in London, Bristol and Liverpool, closed on 5 August after19 years.
In a statement, it said it had been forced to close because it was unable to pay debts as they fell due. A winding up petition would be issued and the charity placed into compulsory liquidation after a court hearing in due course.
The statement added: “The organisation was routinely audited in respect of its governance; management and financial accountability. All were found to be exemplary with the only problem being that there was not enough sustainable source of income given the high level of needs the charity was supporting.”
It added that despite the best efforts of its “loyal and dedicated trustees”, they had been unable to help the sustainable funding necessary for the charity to continue.
In an article on the BBC’s website on 11 August, Chris Cook, policy editor of BBC Two’s Newsnight, said Kids Company had been run with an “unusually threadbare financial safety net, which made it more vulnerable to financial shocks than it ought to have been.”
He said the normal “rule of thumb” was that charities should hold three months of spending in unrestricted reserves. For a charity spending £23 million a year – Kids Company’s expenditure in its last accounts, for the year ending 31 December 2013 – it should have had a “rainy day fund” of between £4 million and £6 million but it had just over £43,4000 in its general fund plus £1.28 million in restricted funds.
The financial failure of one of the UK’s most high profile charity provides a useful wake-up call for charities and their trustees to reassure themselves that their finances are in robust shape.
Trustees have legal responsibilities for their charity, which include not exposing its assets to undue risk, having in place robust and effective financial controls and having an appropriate reserves policy. While rare, trustees can be held personally liable to their charity for any financial loss they cause or help to cause by acting improperly.
Moore Thompson’s expert charity team is ideally placed to work with trustees and their charities to strengthen financial systems and controls and review broader financial and funding issues, to ensure organisations have a firm foundation from which to operate. For more information, please contact us.