Charities must act early to manage financial difficulties, Charity Commission advises

The recent closure of a number of charities, including some well-known high profile organisations, has prompted the Charity Commission to investigate the charitable sector’s financial resilience.

The Charity Commission (‘the Commission’) recently published two reports showing that trustees who actively take early, pragmatic steps to identify and manage financial difficulties are likely to achieve better outcomes for their charities and the beneficiaries whose interests they guard.

The Commission identified 94 charities with incomes above £1 million whose auditors had highlighted potential or existing financial difficulties. The total turnover of the sample group was more than £462 million.

The Commission’s review of the charities’ accounts found income reductions and a range of cost factors were the chief cause of financial problems. The review also reported that trustee responses included creating business plans to increase service use and revenue, and increased risks management, with varying rates of success.

The Commission also undertook detailed monitoring and compliance visits to 10 charities in financial distress, five of which were drawn from the study group. The visits established that the majority of trustees had acted competently, and that those who had intervened early and investigated diverse options to stabilise and improve finances had managed to steer their charities through testing times.

The Charity Commission’s two reports highlight key themes and offer advice that charities in all states of financial health need to heed. The reports conclude that:

  • the case studies prove that taking early steps to confront financial problems pragmatically minimises risk to beneficiaries and charities’ operational funding
  • a range of options, including mergers and collaborations, are available to charities to address financial predicaments and achieve positive outcomes to negative situations
  • trustees must stay alert at all times to the risks of financial distress, especially as the future outlook for charities remains challenging.

The current financial pressures UK charities face are made clear by the fact that nine of the Commission’s 94-strong study group are no longer operating.

The Commission’s reports will be followed by its campaign to educate trustees and staff about successful financial management of charities and to equip them with the necessary tools to enable them to deliver it.

Paula Sussex, Chief Executive of the Charity Commission, said: “The economic reality for charities across the UK is a challenging one. But trustees will better serve those they need to support by exploring mergers and collaborations, diversifying income streams or taking other steps to manage their financial difficulties at an early stage.

“Charities should not take unmanaged risks, but the risk of doing nothing is only too real and the consequences can be devastating, particularly where vulnerable beneficiaries are involved.

“A head-in-the-sand approach raises concerns about the ability of trustees to run their charities effectively and can erode public trust.

Ms Sussex added that although the Commission was unable to rescue financially-compromised charities, it was keenly aware of the problems they were experiencing. The Commission has pledged to update its guidance and find new ways to improve its accessibility and reach in a bid to minimise future financial failures in the sector.

Moore Thompson has extensive experience of working with charities in all states of financial health, and we are keen to offer our expertise to assist trustees in maintaining and improving it. For more information, please contact us.