Charities urged to seek insolvency advice early

Published on September 26, 2016 by Crawfords Accounting

Charities facing financial difficulties have been told to seek insolvency advice early in order to achieve the best outcomes for their beneficiaries.

After a number of high-profile charity collapses, the Charity Commission undertook a review of financial resilience in the third sector, and identified 94 organisations facing potential difficulties, with incomes of more than £1 million each.

The combined incomes of these organisations came to £462 million, and the Commission’s review looked at five of the 94 in more detail, with another five detailed studies selected from third-party reports of charities in difficulty.

From the analysis, the Commission identified three main trends – including some common-sense suggestions that shouldn’t come as a surprise.

They included:
• Address financial difficulties early to minimise the risk to beneficiaries.
• Explore a number of options, e.g. mergers and collaborations.
• Stay alert to future risks due to the current challenging outlook.

The Commission also pointed charities towards its guidance on managing finances, including financial planning, managing difficulties and reducing the risk of charity insolvency.

But the suggestions should not come as a shock – and for any organisation, whether non-profit or commercial, managing financial risk should be part of a proactive and ongoing process in the best interests of beneficiaries and shareholders alike.

Seeking insolvency advice early is good practice when financial difficulties rear their head, as they are likely to do from time to time.

And due to the non-profit nature of charities, many may have fewer financial reserves to call on when incomes drop or expenditure increases unavoidably.

In this sense, charities that operate on a ‘break even’ principle are akin to so-called zombie businesses, whose incomes only just pay for their outgoings, and who are therefore not well insulated against economic shocks – making prompt insolvency advice even more important for those organisations already on the edge of affordability.

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