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Jonathan Birch looks at issues facing Trustees of Charities and Not-for-Profit organisations

8 September 2011

In the midst of unprecedented economic difficulties, Charities and not-for-profit (NFP) organisations face a fight for survival, as our detailed research of the views of senior finance professionals in the voluntary sector shows.

In March and April this year FRP carried out some research into the charity and NFP sector, in partnership with Third Sector, the leading media title for this sector.  In what are probably the most challenging economic times charities and NFPs have faced in many years, we asked almost 100 senior finance executives about the current and forecast financial health of their organisation. 

The results were very sobering, if not unexpected - more than 20% of senior finance executives said their organisations’ solvency is at risk because of public spending cuts and reduced donations.    It is also clear that faith in Whitehall’s ability to bail out the sector is dwindling, with fewer than 8% of respondents considering that the Government had fully grasped the impact of public spending cuts on voluntary organisations.

This economic downturn is striking, because all voluntary organisations are affected, no matter what source of income they rely upon.   Some 40% of those surveyed regard restructuring as a viable option; whilst this is encouraging as it indicates that many organisations may be salvaged, there still remains a large proportion of organisations that are uninformed about the restructuring options available to them if they experience solvency issues.  If advice is sought early, it is possible to save the organisation, either through a restructure, sale or merger.   If advice is sought too late, the risk of failure of the organisation is greatly increased.  

Although Trustees or Executives in such organisations are skilled and deliver vital services successfully, very few have experience of restructuring or insolvency.  There is a degree of uncertainty about their legal duties and responsibilities, as laid down in The Insolvency Act 1986.

In our experience, having recently been appointed to deal with the insolvencies of The Work Foundation (TWF) and CILT, the National Centre for Languages, increasingly common causes of financial difficulty are pension deficits and a decline in income.  A large number of charities still have defined benefit pension schemes in place and these schemes can become a big drain on a charity’s finances as fundraising gets more and more challenging in the current economic climate.

In the event of impending insolvency, it is vital that voluntary organisations act quickly.  This may secure the preservation of their essential services and also reduce risk of personal liabilities for Trustees.  It is often the case that Trustees do not regard pension deficits in the same way as they would if, say, the charity owed a trade supplier a significant sum on money.  In reality, and in law, their duties are the same and the Trustees have a legal responsibility to act in the best interests of all the creditors of the charity.

It is far better to recognise solvency issues early rather than being forced to close the organisation down in its entirety.  Furthermore it also affords a way for Trustees to defend themselves against potential personal liabilities if they can show that they sought and acted upon professional advice in good time.

If your organisation is experiencing pension scheme difficulties or your funding has been cut or withdrawn, acting sooner rather than later could be the key to keeping your charitable services on the road, both now and in the future. 

Download a full copy of the FRP Advisory whitepaper ‘Voluntary organisations and the economic crisis: Riding the storm’

If you are concerned, or have any queries relating to your charity and NFP clients, please contact Jonathan Birch on 0121 710 1680