Charities and educational organisations, just like private sector businesses, need to manage their cash-flow levels carefully.shutterstock_374290978

Rise in charity insolvencies

While the economic upturn should be good news for those reliant on donations and grants, a perfect insolvency storm is brewing that could threaten the charity sector. This looks set to increase the need for turnaround and recovery advice, and even formal insolvency procedures in the sector.

Businesses are more likely to run out of cash and become insolvent in a growing economy than a falling one. The same applies to charities. For this reason, the insolvency trade body R3 has urged charities to take extra care in the coming months.

Problems in the charity sector

Cuts to local government spending and a fall in legacy income are already causing considerable problems in the charity sector. Add to this the recent criticism of high pressure fundraising tactics and the result is a perfect storm that could see insolvencies surge in the year ahead.

There has also been some criticism in recent months of charities’ commercial arrangements with a number of third parties. E.ON and Age UK have been urged to refund pensioners over a fuel deal that earned the charity £6million a year. However, the special rate the customers were offered was up to £245 higher than the cheapest tariff.

There have also been allegations that collection behaviour by charities in the street has been overly aggressive. Add to this the cold calls many people have been subject to and you soon see why the sector is expected to struggle.

Controversy comes at the worst time

Speaking on behalf of the insolvency body, Matt Dunham, a council member of R3, said: “Clearly aggressive fundraising tactics and misleading commercial arrangements are not acceptable and charities need to ensure they are following best practice at all times.

“Unfortunately, this controversy could not have come at a worse time. Charities which deliver local services on behalf of local authorities are being affected by spending cuts and facing competition from commercial service providers. Legacy income has been falling and the rise in the minimum wage has pushed up costs.”

The success of charities relies on their ability to strike a balance between maintaining the focus on their mission, while running the charity in a financially sustainable way. Charities that focus solely on their mission risk running out of money, while those that become too commercial could face criticism from the British public.

The size of the charity sector

In the past year, there has been a rise in the number of charities experiencing financial difficulties as a result of these factors. There are currently more than 160,000 charitable organisations in the UK, employing over 1.1 million people. Unfortunately, according to the National Council for Voluntary Organisations, income in the charity sector has been falling since 2009/10. If this trend continues, it would be disastrous not only for the charities’ causes, but also for their employees.

We can charity trustees do?

The Charity Commission has previously warned trustees of their dual duties to protect the charity’s assets, and ensure the assets are used to further the charity’s reach. Like directors and officers of limited companies, the trustees of incorporated charities do not face personal liability for the charity’s debts.

However, trustees should have a basic understanding of insolvency law. Preventing a charity from trading in circumstances where it has become insolvent is one of their key fiduciary duties. They should also be prepared to take and act upon professional insolvency advice at an early stage.

How can we help?

In today’s challenging environment for charities, early consultation with company rescue and restructuring specialists can help to prevent charity failure. At Company Debt, we work with company directors and charity trustees to find workable solutions to operational and financial problems. For more information, please get in touch today.