What to do if your organisation is at risk of financial difficulty?

If your organisation is struggling financially, you are not alone, so many contributory factors mean hard-working and much-needed organisations are facing uncertain futures.

If you are part of one of these organisations, act early if financial issues arise; this is crucial in preventing insolvency. Open communication with stakeholders, including the Charity Commission, employees, and funders, is vital.

Proper planning, early action, and maintaining transparency can help trustees navigate difficult financial situations responsibly while protecting the charity’s beneficiaries, assets, and reputation.

Essential resources from the Charity Commission

 Charity Commission -what to do if your charity is facing financial difficulties

Charity Commission insolvency_checklist

Charity Commission 15-questions-you-should-ask/charity-trustee-meeting

Charity Commission how-to-close-a-charity

Here are things that as a trustee you should consider:

1.Legal Duties and Responsibilities

Trustees’ Duties

Trustees have a duty to act in the charity’s best interests, which includes recognising signs of financial distress early and taking appropriate action. They must ensure they are acting in line with their obligations under charity law and other relevant legislation.

Charity Commission Notification

Trustees must inform the Charity Commission if the charity is unable to pay its debts or is at risk of insolvency. This transparency is part of their responsibility to provide oversight and accountability.

Insolvency Tests

Charities must assess whether they are insolvent, using:

Cash Flow Test: Whether the charity can pay its debts as they fall due.

Balance Sheet Test Whether the charity’s liabilities exceed its assets.

Legal Liabilities

Trustees should take care not to incur new liabilities that the charity cannot reasonably meet. Continuing to operate when insolvency is unavoidable can lead to personal liability for trustees in certain circumstances.

2. Early Action and Financial Assessment

Identify Warning Signs

Cash flow issues, delayed payments, increasing creditor pressure, and reduced income can all indicate insolvency risks. Acting early can help prevent escalation.

Seek Professional Advice

It is crucial for trustees to seek early professional advice from accountants, insolvency practitioners, or legal experts who have experience with charities. This helps trustees understand their options and fulfill their duties.

Financial Forecasting

Producing accurate cash flow forecasts and monitoring financial performance is essential in understanding the charity’s financial position and taking steps to reduce risks.

3. Options for Insolvency

Rescue and Recovery

There may be opportunities to avoid insolvency through restructuring, cost reduction, or increasing income. Fundraising efforts, grants, or negotiating extended payment terms with creditors may also help.

Merger or Acquisition

If the charity is unable to continue independently, a merger with another organization may be an option. Mergers can preserve services and assets while addressing financial difficulties.

Voluntary Arrangement 

Company Voluntary Arrangement (CVA)can be considered to reach an agreement with creditors on payment terms, providing a structured approach to settling debts.

Winding Up

If no viable options remain, trustees may need to consider closing the charity through voluntary liquidation or another formal insolvency procedure.

4. Personal Liability Risks

– If a charity is incorporated (e.g., a charitable company or CIO), trustees are generally protected from personal liability unless they have acted negligently, recklessly, or unlawfully.

– For unincorporated charities, trustees may be personally liable for debts, especially if they have taken on liabilities without adequate consideration of the charity’s ability to repay them.

5. Staff and Stakeholders

Employees

Trustees need to understand employment law requirements, including obligations to staff during a potential insolvency. This includes considering redundancy procedures and outstanding payments to staff.

Funders and Beneficiaries

Transparency with key stakeholders, such as funders and beneficiaries, is crucial to maintain trust. Open communication about the charity’s financial challenges, and how these might affect projects or services, is essential.

6. Asset Protection and Use of Restricted Funds

Restricted Funds

Trustees must ensure restricted funds are only used for their intended purposes, even if the charity is in financial trouble. They must seek permission from the Charity Commission if they need to change how these funds are used.

Disposal of Assets

Any sale or disposal of charity assets must be conducted in line with charity law. Trustees should get professional advice to ensure they meet legal requirements and obtain fair value.

7. Minimising Risks and Planning Ahead

Risk Management

Regularly reviewing financial health, maintaining accurate records, and creating contingency plans are all part of good risk management to prevent insolvency.

Contingency Planning

Trustees should develop a plan for managing financial challenges, including identifying which services to reduce or cut in the event of financial difficulty.

If your organisation is facing an uncertain future and you would like support and guidance please contact Kathy@huntsforum.org.uk