Expert advice

Dipping into restricted funds 1

Finance | 8 Feb 2012

Tempted to raid your restricted funding to cover budget shortfalls?  It's possible, says insolvency practitioner Stephen Goderski, but only if you follow certain steps.

The economic downturn has put a real strain on many charities’ finances and the outlook for 2012 does not give much cause for optimism.  For some smaller and niche charitable organisations the drop in funding and rising costs can prompt the temptation to dip into their restricted funding.

Restricted funds are those provided to a charity for a specific purpose and are not necessarily intended as a bolster to keep the organisation afloat.  They tend to be assignment or project-focused.  They may be income funds, which are used at the discretion of the trustees in relation to a particular aspect of the charity’s work, or they may be capital funds, where the assets are required to be invested, or retained for actual use.
 
It is best practice to keep restricted funds in separate bank accounts and record the financial activity relating to them.  The Statement of Recommended Practice (Sorp) certainly makes it clear that a charity’s accounts should provide a summary of its main funds, differentiating in particular between the unrestricted income funds, restricted income funds and endowment funds.  

The appendices in Sorp also make it clear that the trustees of a charity are in breach of trust if the organisation uses restricted income other than for the purpose it was donated.  This could result in the trustees having personally to make good any misspent funds.

So what can charities do in the difficult times when donations fall and essential running costs cannot be paid?

Talk to the donors

It is important to have a frank and honest dialogue with donors of restricted funds at the earliest possible opportunity.  In doing so, explain the charity’s current financial position and explore the possibility of renegotiating with them to have a restriction removed.  The more robust your financial forecasts, accounting and rationale, the more persuasive your proposal will be.  Try and factor in what interests the donor in the charity’s work and ensure that this aspect will still be supported in some way if their funding switches to unrestricted.    

To change funding from restricted to unrestricted use, it is best to have documentation authorising this from the donor.  A letter from them may suffice and would demonstrate their approval of the change.

In search of new income

If it is not possible to renegotiate restrictions on funding then an urgent appeal to/for funders may be needed to bring in vital unrestricted donations to finance the organisation’s running costs.  Talk initially to your main funders and see if there are others in their network that they can recommend you approach – or who they would be happy to talk to, on your behalf.  Also look at specific aspects of the charity’s work and whether certain components could attract grants.  Given the public sector cutbacks, are any local authorities, NHS trusts or government organisations currently looking to outsource specific work or projects for which your charity could tender? Also, a new approach to your fundraising may be required if the tried and trusted/formulaic approaches are not raising sufficient revenues.

Be vigilant about costs

Keeping a close eye and iron fist on costs will be vital in the coming year.  This will mean continually assessing ways to reduce rent, salary bills and other outgoings.  Where possible try and swell your volunteer pools to enable you to deliver the charity’s work while minimising financial expenditure.  

It may even be sensible to consider consolidation or joint ventures with other charities that have a synergy to you.  This can help you to share and pool resources and, when it comes to purchasing, accessing better economies of scale.

Step back and review

With costs rising, charities are also encouraged to take stock of whether they are still able to meet their founding goal, objective or purpose in the current climate.  If more money is being consumed simply running the organisation rather than achieving its objectives, then it’s time to review things. Charities worried about the future are wise to consider whether their founding goals can be achieved through different working models, eg via alternative resources, premises and locations?  Can outsourcing certain aspects of what you do bring the cost-base down?

A collective responsibility

In the downturn, monitoring their charity’s financial position should be a key activity of trustees.  They should know on a monthly basis the state of the charity’s different funds and what shape the balance sheet is taking.  For those that do not, it is important that they insist on monthly management accounts and discuss what the forthcoming month and quarter may hold.  Regular communications and dialogue between the trustees and the charity’s managers are fundamental, as this will help everyone to identify and tackle problems quickly. 

Summary

It is a tough economy for charities and it’s unlikely to get better soon.  When you factor in the cost of fuel, property and pension issues on the horizon, the future costs of running a charity look very bleak.  Before it’s too late, charities need to review every aspect of their organisation.  Historical ways of doing the charity’s work may need to be reassessed and changed to make operations more efficient and less costly. At the same time an innovative mindset that explores new funding streams or helps the charity deliver its work more efficiently will aid that charity’s survival in the difficult times ahead.

Stephen Goderski is a partner at Geoffrey Martin & Co

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