The current economic environment may not only be taking a toll on your charity’s finances but also on your mental health as you attempt to consider questions such as:

• How secure is our cash flow and how reliable is our forecast?
• What is the impact on funding, related costs and our project profitability?
• How do I reassure our trustees about our financial position?
• What can we do ourselves and at what point might we need professional advice?

These are difficult questions and challenges to tackle, but my key message is to take early positive actions towards securing the financial sustainability of your charity. In support of #MentalHealthAwarenessWeek, I have set out a few areas for you to think about in order to help you decide on next steps.

Understanding your overall business model

When the financial position is under threat, it can be essential to break down your charity’s business model into its key component parts to get a clear picture of where any operational surpluses or deficits may be present. This will help you understand the financial performance of each individual activity you undertake, and also any funding restrictions that may mean that you cannot divert funding to other parts of the organisation.

Actions to consider:

• Analyse your activities by both financial performance but also strategic performance – are there any activities that are not important and perform badly from a financial perspective? If so, consider stopping these immediately.
• Ensure you have clarity over any restricted sources of funding and what costs are linked to these. Should the funding cease, what would be the impact on your general funds in terms of meeting any gaps to continue projects or fund overheads?
• Create a funding pipeline mapping out your key sources of funding and when these are due to end or be renewed. Ensure you have clarity over whether the source will be replaced or whether you need to consider ending these activities.
• Identify any sources of funding linked to performance conditions or a payment by results mechanism and whether these are impacted by any short or medium term disruption to the delivery of your charitable activities.
• Link your risk register to the above and ensure you have plans in place to mitigate your key operating and financial risks.

Cash versus profit and impact of funding restrictions

Many charities plan ahead by looking at a budget for the forthcoming financial year. Your budget is normally based on the income and expenditure you are expecting on an accruals basis, so adjusted to reflect the year to which is relates, not necessarily when you would expect to receive the income or incur the cost.

Project financing can often be received in advance or in arrears. Restricted project funding may also be cash you have in the bank, but not available for general purposes. Therefore, your budget should be supported by a cash flow forecast on a pure receipts and payments basis which reconciles back to the cash you have in the bank. The cash figure should also clearly distinguish between restricted and unrestricted cash reserves.

Actions to consider

• Review your budget and cash flow forecast to ensure that each one is clearly prepared on either an accruals or receipts and payments basis
• Confirm that your cash flow forecast splits our your unrestricted cash resources and be clear that your working capital requirements can be met out of unrestricted cash alone.

Engagement of budget holders

Have you considered how engaged your budget holders are, in particular any non-finance managers? Are they fully accountable for their budgets and do they fully understand the impact when budget variances occur? Have any of your budget holders been furloughed? If so, in the shorter term, where does the control and responsibility now sit?

Actions to consider

• Arrange a virtual catch up with each key budget holder.
• Discuss with them any concerns and identify where budget variances are expected, where are the uncertainties and what is the probability of them arising?
• Identify any gaps you may need to pick up with another member of the team.
• Ensure these variances are built into any cash and/or profit forecasts.

Reporting and accessible information – engaging the board

Your trustees may be feeling concerned and have their own questions and concerns around the financial position. Clear and concise communication will be key to addressing these concerns and giving the trustee board the assurance they are looking for.

Actions to consider

• Ask during the next board meeting if the information being provided is clear and accessible to everyone – does the board have any requests for extra information or a different presentation?
• Would it be helpful to provide a one page dashboard or other quick, visual representation of the financial position that can be easily updated on a regular basis?
• Is any training required on the analysis / trends shown by your key business drivers or performance indicators?

What other options should be considered

After gaining a full understanding of your business model, you may need to consider how to best utilise your capital assets to support your operating position in the short term. It is important to remember that when using the proceeds from the disposal of a capital asset or investment to fund working capital is a permanent reduction in your reserves position.

The trustees of a charity are also required to think about all possible future options and this may include an increase in collaborative working, formal partnerships with other similar organisations, or even a merger.

Actions to consider:

• Revisit your reserves policy and link this to your short and long term cash flow requirements.
• Consider whether all of your charitable assets are utilised to their maximum potential.
• Identify any assets that may be available for disposal in order to generate cash, specifying the likely lead time in being able to access the proceeds.
• Arrange a trustees’ meeting to focus purely on strategic options, and identify any actions that can be taken to start thinking about these now rather than waiting until any timing is critical.

When to think about taking further advice

For charitable companies, the ‘wrongful trading’ provisions are currently suspended from 1 March 2020 for 3 months, it is not known if these will be extended. Wrongful trading means that you continue to operate when you know you cannot avoid insolvency proceedings.

Although these provisions have been temporarily lifted, I’m sure that no trustee would want to knowingly breach them. The critical piece of information here is your cash flow forecast and at what point you think you may not be able to settle your debts as they fall due.

Actions to consider:

• By following all of the steps above, you should now have a clear understanding of your financial position, and where you have significant uncertainties.
• Some transactions, such as the disposal of land and property requires specific approval from the Charity Commission, so refer to the guidance on the gov.uk website.
• If you consider that you may be insolvent, then you should contact an insolvency practitioner. They may be able to offer a short, free introductory call to establish what level of support you require.

Further guidance

The above suggestions will be applicable to the majority of charities, however there can be specific considerations depending on how you are legally structured. Further guidance is available within the Charity Commission’s publication CC12 ‘Managing a charity’s finances: planning, managing difficulties and insolvency’.