Susan Robinson: Drawing on reserves

18 Feb 2021 Expert insight

Susan Robinson from Kreston Reeves reminds charities that “cash is king”

This content has been supplied by a commercial partner.

There was already a lot of discussion on the adequacy of cash reserves for many charities going into the pandemic. For a number of years, the smaller ones (the larger proportion of charities) have not had sufficient reserves to meet a normal rainy day let alone the monsoon experienced in 2020.

Society has many needs and challenges, and people (including government) do not understand just how much the sector plugs the gaps in providing support where services stop. A question any charity should ask itself is: “If we were not here, what would happen?” This is a useful question to help a charity build its strategy, but also a key reminder to the greater public and government about what role smaller charities play in society today.

The charity sector has often in the past been criticised for not spending its funds on charitable activities, and for holding too much cash. But now, conversely, many in the sector are being criticised for not having enough cash reserves to help them through this difficult time, and there is currently little end in sight to the pandemic. Being somewhere between a rock and a hard place certainly comes to mind.

Cash flow is crucial during these worrying times, and the ability for real time and accurate cash flow forecasting has become more useful than annual budgets. A cash surplus in March will not help a lack of cash in October, and understanding why this happens and how you can mitigate against it is really important.

However, from a trustee position there is another crucial point – information. Decisions can no longer wait until the next meeting; time is of the essence at the moment and all organisations need to be able to make fast and well-informed decisions. But, decisions should never be made without the right facts, and scenario planning can help enormously in this. Charities should consider that if they make this decision today, what other factors can come into play later down the road? Unfortunately, none of us have a crystal ball. Our decisions will have to be made on the facts that we have at the time, and the knowledge and experience the charity trustees and advisers bring to the table.

It is really important that all decisions and any discussion which led to them being made should be clearly documented for the future. Hindsight, as we know, is a wonderful thing, and all decisions need to withstand scrutiny. Whatever we decide today will impact on the future, and hence even in difficult times, trustees must still make strategic decisions armed with the knowledge and information they have.

Looking at the importance of scenario planning, let’s consider some of the most typical scenarios many charities may face:

Scenario one – income generation

The charity looks to diversify its activities, and a new option is put forward to bring in more income. One of the first things to consider is whether the charity can carry out that activity within its objectives. All is not lost if it cannot, because if it is appropriate then an application can be made to the Charity Commission to change its articles/deeds. It is important to remember that this will take time.

Consider also: how does this new income stream fit with the charity’s existing services? Are any large upfront costs/outlay required, and does it mean additional staff and a consideration of TUPE rules? Trustees need to understand the full implications and to be provided with full information. It is important to remember that cash is not king at any cost. It is also vital to be aware of issues such as whether the new income source is really trading activity, in which case a new vehicle needs to be established to operate this activity through, rather than the charity.

Scenario two – cash flow difficulties

The finance director announces the charity will run out of cash in four months. While that statement might indeed be the reality, and one charities may have stated many times in the early days of the crisis, it is also not enough information on which to make informed decisions for the future. Trustees need to see detailed and up-to-date cash flow statements that lead to this conclusion. They need to understand what happens if they do need to close the charity and also what the rules are on charity insolvency.

In understanding the rules, decisions can be made at the most appropriate time. However, there may also be some alternative options to consider. For example, one project may be draining the resources of the charity, and in stopping this project, it will help to sustain others. Therefore, good quality management accounts should be split by projects and should help to identify this.

Other questions which may be asked include: are the charity’s assets being used appropriately, and are they all needed? All of these areas of consideration need a good level of information to enable full discussion and deliberation.

Scenario three – contract retendering

When an existing contract is up for retender, the immediate reaction is likely to be to retender because you have been doing a great job for the last three years and are best placed to continue this work. But have you asked yourself if this really is the case? The contract may have had no price increase, even though the national minimum wage has increased over the last three years. Can the charity really continue to fund this project out of its existing reserves?

Sometimes charities have to say no and walk away. Discovering half-way through a contract that you are unable to continue can be even more expensive and problematic, especially if there are exit penalties. This situation can also potentially cause long-term damage to the charities reputation and relationships with others. Once again trustees need to have all of the information available and to hand in order to make a proper decision.

These are just a few scenarios that charities may face. Although cash is undoubtedly king, when it comes to funding the future of your charity, I would add that equally important is that “information is the lifeline”, especially where it enables informed and timely decisions to be made.

Susan Robinson is head of charities and not for profit at Kreston Reeves

Charity Finance wishes to thank Kreston Reeves for its support with this article 

More on