One of the biggest causes of company failure in times of economic recovery are organisations that overstretch themselves to capitalise on a reversal of their fortunes, before they have the firm financial footing to do so.

The recent failure and compulsory liquidation of the Kids Company, the charity that has done a huge amount of good work for disadvantaged children across the UK, is a shining example of just how important it is that every organisation, even those that are not-for-profit, manages their finances in a responsible way.

Allegations of financial mismanagement

The collapsed charity Kids Company was forced to close earlier this month amidst allegations of financial mismanagement by the board of trustees. It is claimed that the flamboyant chief executive Camilla Batmangehlidhjh, and the BBC’s Alan Yentob, who led the board of trustees, failed to heed warnings about the charity’s lack of financial reserves.

The charity, which supported disadvantaged children with the help of donations from Coldplay, JK Rowling, and Richard Branson, was forced to close its doors after a £3million government grant was ‘mis-spent’, and questions were raised about the transparency and probity of its financial management.

According to a recent story in the Guardian newspaper, two finance directors quit the charity in less than three years over frustrations about its failure to build up financial reserves. An analysis of the company’s accounts also revealed that despite a funding increase of 75 percent between 2009 and 2013, the charity was burning through cash at much the same rate.

A house of cards

One source who worked for the charity in a senior role for a number of years told the Guardian: “If you keep building an organisation without building reserves, then it’s a house of cards and it will fall down.”

The source also explained how the charity had “become complacent” about its lack of reserves, the result of repeated government bailouts the charity had come to rely on. Warnings on the charity’s accounts also stated that the company’s increasing reliance on grants had “often put a strain on the charity’s cash flow.”

The charity’s seemingly inevitable demise was the result of the government’s decision to bring the charity’s annual £5million grant to an end. Instead, the charity received a one-off cash injection from the government of £3million intended to pay for its restructure. The situation reached crisis point when it emerged that £800,000 of the grant had been spent on paying the charity workers’ wages and not on the intended restructure.

Official Receiver appointed as liquidator

The Insolvency Service wound up Kids Company and has appointed the Official Receiver as the liquidator of Kids Company as the charity is wound up in the High Court. The Charity Commission, the independent regulatory body for charities in England and Wales, has opened an inquiry into the administration, financial management and governance of the charity. The aim of which is to identify any wider lessons trustees and charitable organisations can benefit from in the future.

Kids Company employees who have not already lodged a claim for redundancy and other entitlements with the Redundancy Payments Service have been urged to call the helpline on 0330 331 0020.

Self employed individuals who have provided services to Kids Company are not entitled to a redundancy payment and will instead be treated as a creditor in the liquidation. To make a claim for money owing for services provided, you should email with your company details and the sum you are owed.