Charity Commission guidance on managing financial difficulties and recovery

Trustees, in particular those of smaller charities, will welcome recent guidance from the Charity Commission on working through financial difficulties as a result of the COVID-19 pandemic.

The guidance, which we recommend trustees read in full on the Government’s website, offers practical advice on managing finances, considering the charity’s best interests, and what to do if your charity is no longer able to operate due to coronavirus-induced financial pressures.

The document signposts charity networks, independent examiners and auditors as good sources of advice should charities still be unsure of how to proceed after following this guidance, and encourages clear communication between supporters, staff, service users and volunteers along the way.

Identifying what is in the charity’s best interest should be the ‘starting point’. Trustees are encouraged to take a number of factors into account, such as the ‘trade off’ between cost reduction and adequately meeting the needs of the charity’s beneficiaries, as well as safeguarding those beneficiaries as the charity goes through potentially significant change.

The guidance goes on to suggest steps that will help trustees, and the key takeaways are as follows:

Manage current cash flow

Trustees should know the charity’s current financial circumstances and those of the immediate future, as far as possible, in order to help prioritise actions. If the trustees believe the charity may not survive, the guidance recommends that trustees should start thinking about when to develop plans to close at this stage, and agree what circumstances will trigger closure.

Consider how to minimise costs and maximise income (and protect current income)

Assuming your charity continues to be operational, trustees should think about which outgoings are not essential, finding cheaper ways of operating, joining forces with other likeminded charities to help negotiate better deals (or even share resources), re-allocating staff to focus on tasks which are an immediate priority, and even putting less pressing services into ‘hibernation’.

Trustees should already be alert to opportunities to benefit from  government schemes which aim to help businesses navigate through the pandemic (including the furlough scheme and schemes to help spread or delay payments like business rates or VAT).

The guide also offers other suggestions, such as communicating with funders to inform them of the charity’s situation and asking if they would consider bringing forward payments where necessary. Other ideas include holding an emergency appeal, seeking increased grants or low-interest loans, making short-term commercial partnerships with local businesses, or using reserve funds or (if permitted) restricted funds and permanent endowment assets.

Monitor operations and finances regularly

The Charity Commission recommends “robust, frequent monitoring and review” to help trustees work out whether the charitable activities can continue to be delivered. Planning when the charity will be able to move into a recovery stage, or the point at which the closure of the charity needs to be considered, is also an important exercise. If this exercise reveals that the charity may get into debt or become unable to operate, trustees should report a ‘serious incident’ to the Charity Commission.

Should closure become necessary, the guide offers some additional guidance on preparing for this.

At the time of writing, we are at the stage where charities are developing a clearer picture of how the pandemic has affected their financial position and some charities may be starting to consider options for reopening and restarting some of their activities.

The Commission’s overriding message is that trustees continue to face difficult decisions and there may not be an obvious ‘right’ decision. The guidance emphasises that trustees will generally be protected from personal liability provided they have “carefully applied [their] skills and experience to decisions and taken advice when needed”.

If in doubt, trustees should seek expert help so please get in touch if you have any governance or regulatory questions.

We’re regularly updating our blog with more COVID-19 legal insights, so keep an eye on this page for the latest legal perspectives relating to the coronavirus.