At the time of writing, the country is entering its sixth week of lockdown. For many people, the support from charities and other not for profit organisations is more essential than ever. However, the third sector, like many businesses, is facing new unimaginable challenges simply never thought possible.

From delivering the essential key services to those in need during lockdown, to ensuring the health and protection of staff and service users, to concerns over the availability of PPE and the requirements for social distancing - trustees face many new and emerging challenges, not least around cash flow to ensure the charity has sufficient funds to survive (which requires careful cash management).

It is important to highlight however, that for those charities providing essential services with secured government or local authority contracts, demand for their services remains high. For others reliant on income streams such as donations and gift aid payments from trading subsidiaries, cash flow management is now critical. 

The phrases “unprecedented times” and “cash is King” have become well used in the media. Both statements are undoubtedly true, but what does that actually mean for your charity? When it comes to cash flow management there are various actions that Trustees should be taking to help navigate through these extraordinary times.

The power of the projection

Many charities will already have financial projections, being a best estimate of the income from various sources and anticipated expenditure for the next accounting period. The goal is to identify the immediate cash flow requirements to ensure that there are sufficient funds to undertake the charitable activities, meet overheads and ideally retain sufficient unrestricted funds for the future in line with the charity’s reserves policy. For some charities, preparing a cash flow forecast may be a relatively new concept. Either way, the message is the same. I would call it ‘the 3 Rs test’ - ensure that your cash flow projections are Realistic, Robust and Refreshed.

Be realistic about the likelihood of income being received in the current situation and provide an accurate assessment of the timing of that income. For many charities, funding comes from various sources. This could be from undertaking charitable activities, receiving donations, trading activities (possibly via a trading subsidiary), and dividend income should your charity hold investments. With almost 25,000 charities registered with OSCR at the time of writing this, clearly every situation will be different, however the general approach taken at this stage will be largely similar. Addressing questions such as:

• How much of my funding is secured, and for what period?
• Can I continue to rely on corporate or personal donations, and if so, will the receipts be delayed due to lock-down?
• When will our trading subsidiary realistically be able to open to customers again?
• How reliant are we on income generated from our investment portfolio?
• To what extent have our investments decreased in value following the decline in the stock-exchange?

All very important questions to assess the likely impact of income in the short-term. However, there is also ‘the here and now’ to consider, and that will mean careful debtor management to ensure amounts due to the charity are received, ideally within agreed terms, doing what you can to minimise the risk of delayed or worse still non-payment. 

New income sources

New income sources should also be explored, including utilising the Government financial support currently available, as well as alternative grant funding available. There are also simple things such as ensuring grant claims are submitted in a timely manner in order to avoid unnecessary delays in receiving the funds. The SCVO website is a useful source of information on funding available, both nationally and at a local level, and I would recommend anyone involved with a charity to keep a close eye on their webpage for up to date information on funding available.

Reducing your costs

Attention should also turn to expenditure and where cost savings can be made to reduce cash outgoings. Areas such as putting non-essential capital projects on-hold should be identified, as well as considering to what extent your charity could be using the furlough scheme to reduce labour costs where demand for services has reduced. Additionally, engaging in discussions with your bank and finance providers to potentially request a payment holiday on loans and taking advantage of the VAT deferral scheme, where that applies, are steps that could be taken to reduce cash outgoings in the short-term. It is always worth remembering however, these arrangements are deferrals and not waivers, so the amounts will still need to be paid, albeit at a later date.

Stress testing your cash flow

Once realistic cash flow projections have been prepared, this is when you should ‘stress-test’ them to ensure your finances are sufficiently robust. This process should include, analysing to what extent failing to achieve the projections would then create a material cash flow issue.

Another well used phrase at the moment is “prepare for the worst, and hope for the best”. Again, this is sound advice, as by fully understanding the implications on cash flow of not meeting income or expenditure targets, will allow action to be taken to mitigate the effects wherever possible. Failure to fully comprehend the implications on cash flow of not meeting targets can potentially have catastrophic consequences, which everyone wants to avoid.

A word about restricted funds

At a risk of stating the obvious, it is also worth taking this opportunity to remind everyone that restricted funds held by the charity are for restricted purposes only. They must not be used for general purposes - without the express consent of the donor or having sought approval from the regulator in certain circumstances. For those charities that have historically run with low unrestricted funds, there is a genuine risk that stresses on the day to day finances may result in a temptation to use restricted funds for another purpose. Trustees should therefore ensure adequate safeguards are in place to prevent this from happening.

The importance of keeping on top of your forecasts

And finally, these projections should be a ‘live’ document, updated and adapted depending on changing circumstances. It is important that these forecasts, which by their very nature are uncertain, be refreshed for actual financial information whilst also revising the financial data for latest assumptions and judgements. It is also advisable to have a rolling set of projections. As the months pass by, the period covered by the projection is extended so that the forecast is always looking, say, 12 months ahead – which, as an aside, is the minimum period that Trustees should be considering when assessing the appropriateness of the going concern basis… but that is a whole other topic for another blog.

Charity specialists in your local area

Our firm is proud to have dedicated specialists advising clients operating in the charity sector throughout Scotland and beyond. If you would like to know more about how our team can assist you, including with cash flow projections, we would be delighted to hear from you. Please don’t hesitate to get in touch with myself or a member of my team.