Covid-19 – Financial considerations for charities
How can charities ensure they continue to be financially sustainable during the Covid-19 pandemic?
Whilst it may not be entirely accurate to say "cash is king" in the charity and social enterprise sector, it remains the lifeblood of organisations without which they are unable to fulfil their objectives. In our recent webinar almost 50% of those polled (of over 100 people) saw the income of the organisation they represented dropping by more than 15% in the next financial year. A significant number envisaged a drop of over 30% in income.
Recent guidance published by the Charity Commission noted that cash flow was the first thing organisations should have regard to – scheduling carefully payments of income and minimising, where possible, costs that might readily be saved.
In addition to the above we suggest there are a number of additional approaches that should be adopted to continue to secure income:
Diversification. This has long been seen as a way of protecting organisations by avoiding reliance on a limited range of income sources which affected by an external factor (such as Covid-19) could be seriously harmful or indeed fatal. Having four or five different income streams provides a greater degree of protection.
One such source of income for many is fund raising events. These have the benefit of both generating income and also providing a point of engagement with the public. Clearly these events will have had to be cancelled for the foreseeable future, though organisations are looking to moving these into online form. Whilst turning digital is not a complete solution, it certainly provides a creative way of filling the gap that has been left. The creativity shown in the past months should not be discarded once we move forward beyond the immediate crisis but should be built upon.
When public events are contemplated in future, greater appreciation should be given to the possibility that they may need to be cancelled. There should be greater scrutiny of the terms of any insurance cover.
Grant funding is another major source of income. Alongside the £750m made available by the government to the sector, there are also many other funds that have been set aside in response to Covid-19. You can find details of some of these here. It will certainly be worth taking time to consider these, whilst recognising that they will all be very heavily subscribed for and are generally directed toward activities linked to mitigating the effects of the virus.
Flexibility. Any new donor funds solicited either from individuals, corporates or grant givers should, if possible, be on the basis that they can be received without restriction. Boards should be flexible in their thinking about how they fulfil their organisation's objects in the foreseeable future. It may be necessary to accept that certain activities may no longer realistically be deliverable. It may not be possible to simply hold on to "what we have done before".
Reserves. In a survey carried out in early May it was noted that 44% of charities had already or were going to draw on their reserves. Charity Commission guidance has previously emphasised the importance of reserves in securing the resilience of organisations but has acknowledged that at the current time it may be necessary to draw on these reserves. Boards will need to consider what approach they should take in future – whether to accept a lower level of reserves as an inevitability or whether to seek to build reserves up to protect against similar future eventualities.
The capital assets of a charity will generally comprise physical property and cash/ investments.
Turning to the first. Many organisations have had to transition quickly to remote working. The question for boards will be to assess to what extent their property needs will now change. The response will depend, in part, on the nature of the property they hold. It will be different, for example, for heritage or arts charities, service delivery organisations or charity shops. Most will also have office space. All of these properties will currently be underutilised and boards will need to consider how best to bring property back to a proper level of utilisation. Alternatively, they may determine that there is a reduced need for space.
In the case of rental property leases should be reviewed to see if there any break clauses which can be exercised to terminate part or all of the occupation. In the case of property owned outright it will again be necessary to review the extent to which the property is required and whether parts may be sold or, alternatively, be let out to third parties. Charities with a larger exposure to property may be well advised to consider (and if necessary take advice) on likely property valuation trends.
There are possibilities available to unlock value from capital assets. These may become opportunities that more organisations take up. The first is to borrow against the value of the assets. The second is to look at using statutory powers to unlock value from permanent endowment, that is, property only the income from which can be used to further the organisation's objects. This may also involve an application for approval from the Charity Commission. In both cases boards would need to consider very carefully the financial implications of any proposal and must have regard to their governing document to establish whether they have the necessary powers to do what they propose. They would be well advised to take professional advice before proceeding.
The Charity Commission recognises that there will not be "an obvious right decision" for boards and also acknowledges that "charities are exposed to a higher level of risk than in more normal times". Any risk assessment previously carried out will have been tested in recent weeks. Whilst boards can take some comfort from the Commission guidance they will be well advised, once the need for any immediate fire fighting has passed, to turn their attention to reviewing their risk assessment. In particular they should look at areas that will have been impacted by Covid-19 (such as employment and health and safety) and bring together the results of that review with amended financial and strategic plans.
In doing so they will give themselves a better opportunity to make their organisation fit for purpose in a post Covid-19 environment.
If you would like to discuss any aspect of this article further, please contact the Charities and Social Economy team on 0113 243 6100.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.