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Charity Commission guidance on managing financial difficulties arising from cost of living pressures

Name: MHA
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· Posted on: February 21st 2023 · read

In recognition of the difficult circumstances in which many charities are finding themselves, namely as a result of rapidly increasing costs, the Charity Commission has recently released new guidance on how to manage financial difficulties.

The guidance, which is aimed at all Trustees and especially those of smaller charities, first reminds Trustees of their duties to provide effective financial stewardship and to ensure that decisions are made in the best interest of the charity and are legally sound.

Acting in a charity’s best interest during challenging economic environments requires finding a balance between reducing costs now in order to be able to preserve funds to support beneficiaries in the future, and meeting the immediate needs of the charity’s present beneficiaries with the possibility that in the future the charity will have to reduce its services or close entirely.

The guidance recommends having open communication with beneficiaries, supporters, staff and volunteers to help find this balance.

Assessing the risks that arise from making often difficult decisions is also considered vital during periods of financial distress. In doing so Trustees should consider:

whether the charity will continue to be able to safeguard beneficiaries and protect them from harm as it goes through potentially significant change
whether it is prudent to sell investments and other assets in order to release funds for current expenditure. Sales may raise less money than might be secured in better economic circumstances. However, it may be in your charity’s best interests, for example, if it is the best option available for meeting urgent needs. You should record clear reasons to support the decision. You may also be able to borrow against your charity’s assets provided you follow the legal requirements.

The majority of the guidance is focused on the considerations and practical steps which can be taken if a charity finds itself in serious financial difficulty. It stresses the importance of cash flow and whether costs can be minimised and income maximised:

Minimising costs including stopping non-essential outgoings, reallocating staff or even pausing some of the charity's activities.
Reviewing the charity's funds to see whether any can be released such as seeking Charity Commission authority to change how restricted funds can be expended.
Conserving or improving sources of income drawing upon regular funders and donors or running emergency appeals could secure.
Addressing financial difficulties in trading subsidiaries charities with a non-charitable trading subsidiary in financial difficulty may need to decide if the charity can justify temporarily supporting the subsidiary.
Managing fuel costs: reliefs for charities as well as utilising Government Schemes, charities should ensure they are paying the correct rate of VAT on its fuel purchases.
Considering the option of mergers or collaborative working a more creative way of dealing with financial difficulties, mergers and collaborative working has its own Charity Commission guidance.
Seeking external financial support and guidance from the likes of NCVO, Institute of Fundraising and the Charity Finance Group.

The guidance also recognises that, in a minority of cases, financial difficulties may result in a charity’s Trustees deciding that closure of the charity is necessary. The guidance sets out the steps to follow to prepare and execute an orderly closure of a charity.