A SURVIVAL GUIDE FOR THE DOWNTURN - THE CHARITY COMMISSION'S BIG BOARD TALK
The Charity Commission's publication on surviving the recession focuses on strategy, financial health, governance and making the best use of resources.
The Charity Commission has issued its Big Board Talk in response to the economic downturn. This report is a useful checklist of what trustees and senior management should be discussing in order to equip their charities for survival in the current recession.
A lot of the suggestions seem like common sense, and some of you may feel that you have already dealt with all of the questions raised. But how many of us never have time to get round to housekeeping and strategic planning? All too often we find ourselves firefighting when things go wrong; just the day-to-day running of the charity takes up so much time that planning for the future health of the organisation takes a back seat.
The commission urges all trustees to sit down and talk about the impact of the downturn on four main areas:
- strategy
- financial health
- governance
- making the best use of resources.
1. Strategy
The recession brings both opportunities and risks. All trustees need to ensure that the impact of the recession is understood and that their charity is in the best possible position it could be to deal with the downturn.
The risks are obvious and some will need to be tackled urgently. How certain is your future funding? Are you reliant on an income stream that is reducing or disappearing altogether? Is income from your investments reducing, and if so, will this cause problems? Are there other ways that income can be maximised, for example by letting unused space in your property? Does increasing unemployment and poverty increase the demand for your services and can you cope with this increase?
There are opportunities as well. For instance, there is a growing pool of potential volunteers as unemployment and part-time working increases. Some of these people could have the skills you need. The downturn provides an opportunity to re-focus operations and ensure they still match your charity's objects. If there has been some object drift, what do you want to do about it?
2. Financial Health
Charities and companies have, on the whole, benefited from a strong UK economy in recent years. In some cases, – perhaps more so in the corporate world – this has led to complacency. Expenditure hasn't been as tightly controlled as it should have and continuity of income has been taken for granted.
Most organisations are now looking at expenditure to see where cost savings can be made. This might be through staff costs with a redundancy programme, or something less severe like reviewing your internet service provider, your professional advisers and your banking arrangements. Accommodation costs are falling in line with the downturn in the property market so this might be the right time to move to cheaper premises or negotiate a lease with your landlord. If your charity has been considering a purchase of property, and if you are in a financial position to do so, now may be a good time to buy.
Are you aware of all your organisation's contractual obligations? Can you continue to meet these obligations, or do you need to review and renegotiate?
This might be the time to use some of the charity's reserves. All charities should have a reserves policy and most choose to have free reserves equal to, say, six months' or one year's expenditure, so that if income was to reduce the charity could continue to operate. If you do not have a reserves policy, now is the time to develop and put in place a policy that works for you. If there is already a policy in place, trustees should consider whether to use these reserves now, either for operational spending or to implement a restructuring plan to secure the charity's future.
3. Governance
Trustees have ultimate responsibility for directing the affairs of their charity. This requires them to ensure that it is solvent and well-run, and delivers its charitable objects for the benefit of the public. Working through the commission's Big Board Talk checklist will demonstrate that trustees are taking appropriate action in the current economic climate.
The trustee body has a great responsibility and it is clearly useful to have a broad mix of skills on board. Consider whether your current trustee body has the right knowledge and experience to guide the charity through the economic downturn.
Trustees should evaluate whether the charity has adequate controls in place to prevent and detect fraud within the organisation. In a recession there is increased incentive for staff and volunteers to commit fraud and this should be considered, however trustworthy you believe your employees to be.
4. Make The Best Use Of Resources
The report recommends that the Gift Aid rules are reviewed to ensure that you maximise your claims. The rules are on HM Revenue & Customs' (HMRC) website: www.hmrc.gov.uk/charities/gift_aid/
If you pay corporation tax as a charity, restructuring your operations could help to reduce your tax liability. Seek professional advice if you think this applies to you.
All charities could consider whether collaboration, joint working or a merger is in their best interests. For some of you this might not be practical, but if your aims are similar to another local charity, it is sensible to at least have open lines of communication.
A merger sometimes forms a new charity to take on the work of the two old charities, and sometimes one charity takes control of the other party. Professional advice should be sought, and, possibly, guidance from the commission will also be needed.
Collaborative working allows both charities to remain separate organisations while enjoying cost savings as a result of a joint project or venture. This could relate to any aspect of the charities' operational activity including administration, service delivery, fundraising activity, advertising or profile enhancement.
This is a brief summary of some of the questions that charities should consider in the current economic climate.
Further guidance is available on the Charity Commission's website, or contact us for professional advice and support on the logistics and/or implementation of any of these suggestions.
CHOOSE YOUR COMPANIONS CAREFULLY
Our Assurance and Business Services team undertakes projects for not-for-profit and charitable organisations reaching far beyond traditional audit and accountancy services.
Systems And Controls
Charities typically operate with limited resources. The overriding wish of stakeholders and founders is for as much resource as possible to be expended on the relevant charitable activity, with as little leakage as possible on administrative costs.
Therefore, as charities evolve, the development of internal systems and controls can lag behind, resulting in some control weaknesses.
We have worked with organisations helping them to understand their various financial processes and the controls in place to protect the assets. We have identified gaps in controls and suggested ways in which they may be plugged. This has ranged from suggesting that the monthly payroll is reviewed by a suitably senior member of staff to implementing complete systems of budgetary control.
Validation
One problem associated with running a charity with relatively few employees, particularly in the finance department, is a lack of a second opinion or fresh pair of eyes. This is where our validation work has been particularly valued.
An individual who has worked hard at a business plan, anticipating where the charity may be in, say, five years' time and adopting a range of assumptions into a spreadsheet model, will reach a point where no amount of checking will detect a formulaic error which could potentially distort the data on which trustees will rely in taking strategic decisions.
We have been able to carry out validation exercises whereby we check the arithmetical accuracy of a budget or business plan, test whether assumptions have been applied correctly to the model and challenge preparers as to the validity of those assumptions. The result for the organisation is a reliable plan/forecast against which management and trustees can monitor performance and make appropriate decisions. Conversely, a validated business plan may show that in the long run the organisation is not viable – then, based on reliable data, trustees can decide on an appropriate course of action to address the issue.
In one instance, we were called on to validate a business plan to give added comfort to a bank contemplating renewing loan facilities. Without such reassurance there was a risk of loans being called in and the charity being unable to continue in the provision of services to a particularly vulnerable group of individuals.
Role Of Finance Director
Many charities lack financial resources to engage a finance director and, indeed, the scale of operations may not be sufficient to warrant an appointment at that level. Nevertheless, trustees need access to financial expertise that may not be available through their bookkeeper.
We can take on the role of non-executive finance director. This includes presenting management accounts provided by the charity's bookkeeper, highlighting key performance indicators and assisting in understanding trends that will enable informed decisions to be made. We can also advise on the financial implications of a particular strategy.
Risk Management
Charities are required to have regard to risk management. We have assisted trustees in discharging their responsibilities in this area in many ways, depending on the degree of sophistication concerning risk management that already exists within a particular charity.
Examples of assignments which we have undertaken include the following.
- Facilitating a brainstorming session at which the senior management team identified the risks facing the organisation, their respective likelihoods and impacts and the controls in place for mitigating those risks. Compiling the organisation's first draft of a risk register.
- Testing the operation of controls identified as mitigating a charity's 'top ten' risks to give assurance to the trustees that controls are indeed effective.
GOVERNMENT-BACKED EFG SCHEME - FUNDING FUTURE GROWTH
The recession has affected us all and the charity sector has definitely felt the squeeze. Philip Hall of RBS discusses the EFG scheme as a possible funding solution.
The Charity Commission's latest economic survey of charities, published in March 2009, showed that just over half of the respondents have been affected by the recession, with 30% suffering from a reduction in income. One third of charities have put measures in place to combat the effects of the recession, ranging from additional fundraising to cutting costs*.
For all organisations, including charities, when working capital becomes – or may become – tight, it's more important than ever to engage with your bank. Despite popular belief, there is funding out there for viable charities: it's a case of making the most of your bank, finding out what funding is accessible for you and ensuring that you can demonstrate that borrowings can be repaid.
The Government-backed Enterprise Finance Guarantee (EFG) scheme was launched earlier this year and is one example of possible funding. The scheme aims to ensure that smaller businesses, including charities, with an annual turnover of up to £25m, have the necessary working capital or investment finance in place to help them through the difficult economic climate. Under the EFG scheme, the Government will guarantee 75% of any loans made. Despite press comment, this is a successful scheme – RBS, at the time of writing, currently has over £200m of EFG loans already agreed or in the pipeline.
By speaking with your bank's relationship manager, you'll be able to find out what solutions are available to you. Having worked in this sector for some time, we find that many charities are reluctant to take on debt but your relationship manager is there to guide you and offer the funding solutions that fit your specific needs. This can often be more than a simple overdraft or loan and will allow you to continue to provide the services and good work you currently do, even if income falls.
For instance, RBS recently backed the charity and social enterprise, Charity Technology Trust (CTT) with funding from the EFG scheme; this provides a good example of how the scheme can help.
Based in London Bridge, CTT was launched seven years' ago and provides charities with a range of services, such as e-communications and payments services, designed to increase efficiency in the core areas of activity: fundraising, campaigns, communications, finance and IT. Over the past two years, CTT has also developed a technology donation programme, Charity Technology Exchange (CTX), which has delivered close to £20m of savings for the sector and at the same time has massively raised CTT's profile.
In the current climate, the services that CTT provides are proving to be even more vital to the sector and the charity's board agreed that the organisation should seek new funding to enable it to accelerate its growth. In order to move quickly, the funding injection needed to be more dependable and more readily available than waiting for funding through grants and donations. James Redhead, CTT's finance director, turned to his bank to discuss options. As a result, RBS provided a £250k funding package from the EFG scheme.
James said, "The funding will enable us to invest in a number of areas, for example to improve our own internal IT infrastructure, which will alleviate a great deal of time, allowing us to serve many more charities and thereby substantially increase our impact on the sector. It will also allow improvements to our product portfolio to ensure we stay ahead of rapidly changing legislation; particularly in the area of payments security."
VAT ROUND-UP - STAY ON TOP OF CURRENT AFFAIRS
Charity Concession Withdrawn
HMRC has announced that the 'charitable building' concession will be withdrawn on 1 July 2010.
The VAT legislation allows the construction or acquisition of a building intended to be used 'solely' for charitable use to be zero-rated. Under the concession, HMRC permitted zero-rating where the building was used 90% or more for a relevant charitable use. In place of the concession, the legislation will introduce a de minimis use test of 95% or more. The method of calculating the 'use' of the building will no longer be defined by HMRC, but should be on a 'fair and reasonable' basis.
HMRC has decided to allow a transitional period until 30 June 2010, where either the old concession or new interpretation under statutory law can be adopted by a charity, subject to conditions.
If the building is put to business use within ten years of the building's completion, a change of use charge may apply. Therefore, charities should keep under review the reduced limit of 5% for business use going forward.
This will be of most concern to organisations wishing to take advantage of the zero-rating provisions for construction or acquisition of a building intended for charitable use, but with a small amount of business use.
Deposits On Land For Dwellings
HMRC has made it clear that deposits received by developers for the purchase of land for residential developments not yet started will not attract VAT where they are released to the developer before the building work commences (e.g. deposits paid to and released to developers by purchasers buying off plan).
This should be of interest to registered providers of social housing for whom the VAT implications could be significant where the deposit is, in practice, released to the vendor before the 'golden brick' stage of construction has been reached, thus calling into question the VAT zero-rating of such land.
Care needs to be taken in the way the contracts are put together and advice should be sought where there is any uncertainty as to the VAT position.
Footnote
*Source: www.charitycommission.gov.uk
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
