Guidance about coronavirus (COVID-19) related financial difficulties in charities and how to work through them.
Applies to England and Wales
We understand that many trustees are having to cope with serious financial challenges that will have a major effect on their charities and those who depend on them. We have therefore set out some guidance for trustees, especially at smaller charities, who may need help facing difficult situations or decisions.
Financial advice and guidance
Our in-depth guidance, managing a charity’s finances covers the considerations and practical steps you can take when your charity faces serious financial difficulties. We have summarised below the key considerations and set out some practical steps.
These are intended as a starting point to help you identify the options to help you address the financial challenges facing your charity. Of course, if you are not sure how to proceed we would always recommend that you take advice. Useful sources include:
- any network to which your charity belongs
- your independent examiner or auditor
Other organisations also have financial resources and links to expert help for charities.
- Small Charities Coalition
- National Council for Voluntary Organisations (NCVO)
- Welsh Council for Voluntary Action (WCVA)
- Institute of Fundraising
- Charity Finance Group
- Charity Tax Group
- Directory of Social Change
- Association of Chairs
Local charities in England can get support from their local sector support and development organisation. Search the National Association for Voluntary and Community Action (NAVCA) member tool to find support near you.
Consider the best interests of the charity
Your starting point is always what is in the charity’s best interests. There are likely to be a number of factors that you will need to take into account to judge this, including:
- the trade-off between:
- reducing costs to support users (‘beneficiaries’) in future, and
- meeting the immediate needs of the charity’s users with the possibility that in future the charity will have to reduce its services or close entirely
- are you able to safeguard your users and protect them from harm as the charity goes through potentially significant change?
- if you decide to sell investments and other assets at this time, you may raise significantly less money from their sale than you would expect in more normal times. This may be in the charity’s interests - for example, it may be the best option available for meeting urgent needs or helping the charity to survive - but you should have clear reasons to support the decision. Borrowing against assets may be an alternative.
- are the decisions you are making in line with your charity’s purposes and any requirements in your charity’s governing document? If they involve lifting restrictions on assets or disposals of land, have you checked if our permission is needed? See guidance about charity land and property.
As trustees you will generally be protected when you have carefully applied your skills and experience to decisions and taken advice when needed. We recognise that these decisions will often be difficult, that there may not be an obvious ‘right’ decision, and that charities will be exposed to higher levels of risk than in more normal times.
We also recognise and will take account of the fact that things may go wrong despite the best efforts of trustees to act in their charity’s best interests. For more information about trustee liability, see section 10 of the Essential Trustee guidance.
In reaching your decisions, it is important to have open and informative communication with users, supporters, staff and volunteers.
Working through the following suggested steps will help you understand your charity’s financial position, create a plan and make decisions.
Step 1: Consider your current financial situation
It is important to make sure you have as accurate a picture as possible of the current and immediate future operations and their financial implications on the charity. This will help you to identify the urgency of any actions and the time you have available to develop and implement a plan to respond to the financial pressures.
Focus on cash flow management. Identify:
- all the payments the charity will have to make over a range of different timescales (for example, the next few weeks / month / three months / six months)
- what cash is currently available to cover payments as they fall due
- what income the charity realistically expects to receive over the same timescales based on a best estimate
This basic form of cashflow forecast gives you a forward-looking view and should enable you to identify whether the charity is at risk of running out of the cash it needs and when that shortfall will happen. Shortfalls of income are likely to be quite common for some charities at this time: identifying when it is likely to happen is key to enabling you to exercise your judgement as trustees in assessing how to help your charity continue in the short term and recover in the longer term.
If you believe your charity may not survive this difficult period, you should consider when to develop plans to close. Also agree who will do this and when to trigger closure if the recovery plan does not succeed. See what to do if your charity cannot continue to operate.
Step 2: options for minimising costs and protecting and increasing income
Having sufficient cash flow to continue to operate is vital: minimising costs and maximising income will, obviously, help improve your charity’s position.
If your charity will continue to operate, consider if it is possible to:
- identify and stop or put on hold on non-essential outgoings, taking account of any cancellation costs
- find alternative, cheaper ways of operating through, for example, use of technology or other efficiencies
- team up with other charities with similar aims to share facilities or resources or negotiate cheaper deals – there can be VAT implications where this involves payments between charities so advice on this matter can be helpful
- re-allocate staff to the priority tasks relevant to surviving the financial challenges
Alternatively, is it feasible to reduce the charity’s services or put it into ‘hibernation’ for a fixed period in order to reduce the charity’s costs? For example cancelling contracts where costs currently outweigh benefits. Check if there are any penalty charges and whether there is any option of waiving these.
Whatever level of activity you decide on, other options for reducing costs include:
- applying for any other government schemes that will help you reduce, spread or delay payments such as business rates or VAT. See the government’s coronavirus business support guidance.
- reducing immediate borrowing costs by rescheduling loan repayments over a longer timescale
Conserve or improve sources of income
- talk to your funders at an early stage to let them know of your situation and plans. They may be able to help by, for example, relaxing restrictions or conditions they may have placed on how payments or grants are to be used. If your charity relies on regular payments from funders, will they agree to bring forward any of those payments?
- are you able to raise funds from an emergency appeal to your supporters or in new ways? See the Institute of Fundraising coronavirus guidance.
- are you able to seek new or increased grants or loans at low or no interest, including from other charities or benefactors?
- consider if there are short term commercial partnerships you could make with local businesses
- can you bring designated funds (money that is earmarked for a purpose but not formally restricted) back into general use?
- do you have reserves (funds which can be freely used for any of your charity’s purposes)? If you do decide to use reserves it may mean that you will have to take steps to cancel or defer projects or other commitments which might otherwise have been funded from them. If you hold reserves as financial investments, you will have to judge whether drawing them down is in the charity’s best interests given the potential loss in value
- if the charity has some funds that can only be used for restricted purposes, is it possible to use these?
- consider accessing your charity’s permanent endowment assets, if you have any, although you may need Charity Commission agreement
Step 3: Keep the charity’s operations and finances under regular review and take any additional actions
Robust, frequent monitoring and review will help you manage your finances and assist you in deciding if you can continue to deliver your charitable activities. Where possible, continue to maintain the cashflow forecast described in step 1 so that you have an up-to-date forward-looking view of when money will be received and spent. Whilst it may be difficult to forecast and budget in the current climate it is this monitoring that will help you manage the situation. It is also helpful to plan for when you might either:
- be able to move the charity to recovery and a return to a more normal operating environment and what will indicate that this is achievable, or
- need to consider closing the charity and the trigger points that will indicate this. To support this decision, it is helpful to understand the likely costs of closure. The government has introduced some relaxations to insolvency law for companies and CIOs and directors of charitable companies and trustees of CIOs should take advice on how this may affect a decision to close.
You should report a ‘serious incident’ to us when your assessment reveals that either:
- the scale of financial loss threatens the charity’s ability to operate and serve its beneficiaries, or
- the charity’s financial reserves or other measures are not sufficient to cover the losses
Use the serious incident form to report this information and the actions you are taking. We assess serious incident reports for various purposes, including whether to engage with your charity to ensure that the right actions are being taken.
What to do if your charity cannot continue to operate because of the financial problems caused by COVID-19
If you decide that closure is necessary, prepare for an orderly closure and focus on the following key areas to protect the charity’s best interests:
- check the charity’s governing document for any requirements and restrictions covering closure. It may specify the process for closure and how any assets left after costs are to be used. If a charity holds any permanent endowment – assets that have to be preserved – you may need to transfer it to another charity.
- decide on the type of closure. In addition to complete closure and cessation of the charity’s activities, it may be possible to merge with or transfer to another charity – financial crisis does not prevent this.
- costs of closure. Build a picture of these costs: they could include unavoidable contract and leasing costs, redundancy payments, costs of transferring assets, or services or parts of a service to other providers. Gather this information, if possible while the charity is a going concern, so that you can use it to help you identify the point at which you must decide to cease operations and close the charity.
- communication. Let users and beneficiaries know in good time and, if possible, point to support that will help them adapt to the loss of the charity’s services and protect them from harm. It is also important to communicate the decision to funders, volunteers, staff, supporters, creditors and other stakeholders.
- advice. You should take professional or expert advice if you decide to close, particularly if your charity is a company or CIO because there are clear legal requirements to meet. Our guidance managing a charity’s finances: planning, managing difficulties and insolvency provides some general advice about the processes to follow, depending on the charity’s structure.
- if you do decide to close the charity consider appointing administrators who will take over and ensure that all the appropriate legal mechanisms are followed
Our guidance has more advice about closing a charity and what to tell us.
You should submit a serious incident report if your charity goes into insolvency or faces closure because of financial difficulties.
This is not needed if you are closing your charity for other reasons. In these circumstances, use the charity closure form so that we can remove your charity from the register of charities.