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Sector Focus: Challenges and considerations in charity financial management

01 May 2020 Expert insight

Events have moved very quickly and the response of charities to these new challenges has varied widely as their sectors have demanded different responses.

There are a number of financial management and reporting tools that may lend themselves to further consideration in these uncertain times, and which may help in the short term to provide more available finance, or at least identify potential funding options.

Endowment funds

Endowment funds come in two types: expendable and permanent.

The notion that you can have an expendable endowment does not sit easily with the legal definition of an endowment, which is supposed to  be something that is preserved into perpetuity. That said, those that have expendable endowments should consider how the charity should make best use of this pot, as there are often no real restrictions over their use and they can provide essential funding for ongoing  activity in these times.

With permanent endowment funds the intention is for capital preservation, and only the income arising (or capital gains) can be used for other charitable purposes. There is however an interesting loophole for permanent endowments which may not be obvious. Where the endowment funds are represented by properties and investment portfolios, and where you have used unrestricted cash in prior years to develop a property on an endowed site, that spend has also become endowed (or it should have been). What is often lost is that the use of unrestricted funds to capitalise into endowed assets is in fact a “loan” between the unrestricted fund and  the endowment fund. If the endowment fund also holds investments, it is possible to consider utilising those investments to repay the loan and provide unrestricted cash to the charity, ultimately settling a credit  that exists in the endowment. The endowment is still preserved in terms of its underlying value.

Restricted funds

These has always been a choice in the Charities SORP for restricted funds: once the project/restriction has ended to retain them as restricted funds, or to transfer them to unrestricted funds. If you consider a fundraiser for a capital project, once the project is complete and there are no further restrictions placed upon you by the donor, the project asset and the remaining fund becomes unrestricted in your hands – you have met the restriction.

Many charities have historically chosen to retain such fund balances as restricted and matched their accounting treatment with the depreciation charge on the asset created. However, given the current circumstances, you could reconsider whether these funds are actually restricted, and whether reclassifying them as unrestricted may assist you. It might not release cash as this is an accounting disclosure change, but what it will do is reclassify those properties as unrestricted and available to the charity for realisation if necessary.

Loan finance

A number of charities have discussed potentially taking out loan finance, which the banks are very willing to do in the current climate, especially where there  is a valuable charity asset to act as security. Remember that where you do provide any charitable asset as security for a third-party loan, you must comply with the requirements set out in S124 of the Charities Act. These require trustees to obtain advice (which can be from a suitably qualified member of staff or an independent contractor) that the loan is needed, that the terms and conditions are reasonable and that you have a cashflow forecast to evidence your ability to service the loan and repayments for the period of the loan.

The ability to evidence your capacity to repay the loan over  the lifetime of the facility may be challenging in the current environment.

Gift Aid

For a number of charities in sectors that have bookings up front (theatres and other space hire venues), we have received calls asking if they can ask members of the public who have already paid for a ticket or hire to convert their funds into a Gift Aid donation. Unfortunately, legislation on this topic is strict. The government’s guidance on Gift Aid includes specific definitions on types of payments and debt conversions, and there is a risk that the trail of money in relation to the payment would not fully satisfy the Gift Aid requirements.

As such, at present the charity would need to repay the original ticket amount to the customer and ask them to make a new donation. Let’s hope the government relaxes these rules. 

Richard Weaver is partner and head of charities and not-for-profit at haysmacintyre

This content has been supplied by a commercial partner. haysmacintyre sponsors the Sector Focus series. 

 

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