Financial difficulties: managing a crisis
This section looks at income shortfall, restructuring and refinancing as well as the mechanics of dealing with an existing crisis and what to do when facing insolvency.
For anyone worried about the solvency of an organisation the Charity Commission gives detailed advice in CC12 Managing Financial Difficulties and Insolvency in Charities.
The main points are:
- Early action is best.
Effective management and financial control should be exercised so insolvency can be prevented or foreseen in its early stages.
Trustees can incur personal liability in an unincorporated charity. - Take professional advice at an early stage.
Corrective action needs to be carefully considered and planned. Such advice should be in writing, and any action should be monitored along with budgets and cashflows. The accuracy of these will depend on reliable financial information, which will now be of the upmost importance. - The paying of professional fees is justified even when facing insolvency (perhaps especially, as it helps protect the interests of the creditors).
- In exercising control over this process to prevent or manage insolvency the trustees are advised to meet more frequently and minute key decisions.
- Minimise the potential loss to the company's creditors.
This may involve stopping or reducing some or all of the charity's activities (for example, not paying out grants even if already promised). - The Charity Commission recommends action under the following headings:
- Dealing with shortages of incoming resources
- Restructuring the Charity's operations
- Refinancing.
Dealing with shortages of incoming resources
Cutting or curtailing planned expenditure so that outgoings are reduced. This may involve not honouring commitments.
- Developing alternative sources of funding or launching an emergency appeal.
The appeal must be phrased in such a way that funds are unrestricted and can be used to pay existing creditors. Donors should be informed that the new funds raised may be used to pay off debts. - Reviewing commitments to see whether they are legally binding or discretionary.
- Renegotiating binding commitments
Most organisations are realists. A legally binding contract is no use if the voluntary organisation is insolvent. It may be possible to get payments advanced, or commitments reduced, particularly if there is a high embarrassment or inconvenience factor.
An example might be where a nursing home for the elderly has a cash crisis. The scenario of having a number of elderly and vulnerable patients suddenly made homeless by an abrupt closure is not one that would appeal to most local authorities.
This only applies if the crisis is genuinely temporary; no funding authority wishes to throw good money after bad.
It should, however, be noted that the Inland Revenue is impervious to this sort of crisis. Its statutory duty to collect money outweighs any public responsibility. It is, in any case, a preferential creditor in insolvency. Other organisations would usually prefer to get their money late than not at all, and once insolvency procedures have commenced most creditors know they will get little or nothing. Banks dislike the bad publicity involved in making a voluntary organisation insolvent, but if they agree to help, they will want to put in stringent controls.
Restucturing operations
- Discontinuance of some activities.
- Transfer of activities to other organisations.
- Sale of fixed assets or investments to raise cash to pay creditors.
- It is vital to take professional advice before selling any assets to pay creditors. If not all the creditors can be paid off, there is a risk that accusations of fraudulent preference could be made, resulting in possible personal liability.
Refinancing
- Borrow money from a bank
- Borrow money from supporters, interest free if possible
- Where the organisation needs to remain in its present premises, arrange a sale and leaseback to release funds
- The Charity Commission also states in 'CC38 Expenditure and Replacement of Permanent Endowment' that where a charity has a permanent endowment it may be possible to seek authority from them to borrow from those funds.
Where next?
Financial difficulties: facing insolvency
Futher resources
Managing a financial crisis - written case study featuring community support charity Birmingham Settlement Watch our video case study on facing and overcoming a cashflow crisis. In this series of six short videos CEO of arts charity WebPlay, Sydney Thornbury, shares her experience of facing and overcoming a cashflow crisis.
