The Charity Commission has identified 1,348 large charities which have current debts greater than funds available to cover them, with 10 per cent of those it analysed found to be in 'significant financial difficulty', according to its latest accounts monitoring review.
Information povided in part B of the annual return, which only charities with an income of more than £500,000 are required to complete, was used to identify the charities that had reported net current liabilities - an accounting term for a state where there are more debts due in the next twelve months than assets available to meet those debts.
The Commission then randomly selected 98 to look into further, and has found that ten charities were in serious financial difficulty, with auditors highlighting issues over whether they could continue as a going concern.
Two of those charities “do not appear to be taking appropriate action”, the Commission said, and the regulator will be following up with them. Five others are now in liquidation or have stopped operating, and three are taking action to resolve their problems.
The majority, 62, had a net liability of less than £500,000, 24 had a net liability of between £500,000 and £2m, and 10 fell in the £2m to £15m bracket. Two charities had net liabilities of more than £15m, but these were both grant-making charities.
Deferred income, where payment is received in advance of delivering a service, was the reason for 28 charities’ net current liability. The report notes that many of these are schools and professional organisations who had “found operating in this way to be sustainable”. Bank loans and overdrafts were the reason in 28 cases.
Other reasons for a net liabilty that were given by a handful of charities were: the timing of grant payments, long-term investments, and reliance on third party support (usually a local authority).
The Commission is urging charities to explain how they are addressing risks better as almost half, 42, did not mention the net liability issue in their annual report, which the Commission said is a “missed opportunity to explain their model”.
Nick Allaway, head of business services at the Commission, who carried out the review, added: “A net current liability doesn't necessarily mean that a charity is facing financial difficulties, but if this situation continues for a sustained period then the charity's long term survival must be questionable.
He said trustees should use their annual report and accounts to reassure funders, supporters and beneficiaries that they are managing the situation.
