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Charity crunch: A threat or an opportunity?

Karen Spears
Head of Charities Group within Restructuring and Recovery

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T: 01923 816400
F: 01923 253402

Jim Clifford
Head of Valuations

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T: 01923 816400
F: 01923 253402

Quote

Many charities are expecting a fall in donations as individuals inevitably look carefully at the affordability of voluntary giving.

Karen Spears and Jim Clifford, Baker Tilly

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  • evolution: Tough times
    This issue covers topics arising from the current economic environment – one which has thrown up new problems and challenges for everyone

Charities are being hit as hard as any other organisation by the credit crunch, but like any well-run business, there are still opportunities out there.

There are increasing signs of stress in portions of this sector, not only on the pure financial side but also in the pressure on trustees and key personnel in relation to corporate governance. With the Third Sector increasingly competing with the business sector, and being funded for projects, or more generally, by the same financial sector, the relevance is clear.

Many banks are taking a lower risk lending strategy and being more selective where they lend money. Grant makers and statutory funders have less funding available and many charities are expecting a fall in donations as individuals inevitably look carefully at the affordability of voluntary giving.

Charities are consequently being pulled in two directions, as a fall in funding and an increase in expenses restrict the traditionally available resources, whilst beneficiaries’ needs are increasing due to economic pressures which adds to their burdens. Is this the time to bewail the difficulties or to look beyond them to see the opportunities?

  • What’s happening in the field?

    We have seen several quite specific effects on charities. Grant makers are getting lower investment returns, so have fewer funds available, and charities relying on their own investment income have suffered the same fate.

    Statutory funders are under pressure to agree below-inflation increases when renewing funding agreements and just like the business sector, the banks are scrutinizing each lending proposal more carefully. They are screening out or trimming back those that are perceived as being of higher risk, are poorly thought out or poorly presented.

    Falling, or stagnant, property values and cutbacks in the construction sector are leading to a reduced ability to sell land to finance other projects and some specific problems are being seen in areas such as independent schools – highlighted by the recent administration of Wentworth College – with some experiencing, and many fearing, a fall in pupil applications.

    In a recent survey undertaken by Baker Tilly in association with Charity Finance and Governance magazine, board members reported that 40% of charities were having difficulties in recruiting trustees and that trustees are looking to limit personal liability by incorporating their organisations.

  • But there is an opportunity

    In both the business and charity sectors, the banks still have a palate for well thought-out, viable proposals. Combine this with the traditional view of the Third Sector as being inherently low risk, and you have an opportunity.

    A well-presented development proposal from a charity may be the kind of safe lending that will help the banker striving to pull his portfolio from the hellfire of over-cooked commercial proposals.

    This opportunity has arisen against the back-drop of increasing Third Sector awareness of investment for growth as a strategy. While collaborations remain widely used – the survey showed 94% of charities having some form of strategic alliance – full mergers remain rare at 6%.

    Organisations are also widening their partnership links within the private sector, so there should still be the opportunities for the well-run charity looking for collaboration, merger and acquisitions within the Third or the private sector to improve their ability to obtain funding.

  • Third Sector

    The board has a duty to maximise the impact of their activities and the way assets are used to promote that impact. The current economic difficulties raise new opportunities for that, such as using under-utilised assets to support the activities of other hard-pressed Third Sector providers, or acquiring or merging with others, whose provision might otherwise fail but which are self-funding when part of a larger whole.

    It is also possible to manage the turnaround of other entities and such acquisitions can deepen or broaden existing service provision for the acquirer.

  • Dealing with the credit crunch

    In our experience, economic circumstances such as the credit crunch bring weaknesses into sharp focus. Poor business planning leaves organisations unprepared for the downturn. Without strong planning, the quality of the charity’s proposition to its lenders is weak and accordingly the perception of risk increases.

    Whenever risk increases, this can lead to lenders pricing more aggressively and ultimately the charity ends up paying unnecessarily high financing charges. Even more concerning is that through poor business planning, a charity’s finances and projects are badly structured, storing up further problems for the future.

  • So how can we help those in the not for profit sector?

    Trustees and management need to develop a strategy that embraces the opportunities for collaboration, merger and acquisition, and a plan for finding and effecting these arrangements. They must also have a risk-aware approach to financial and business management renewed and enhanced to take account of the current economic climate.

    If they are concerned about viability, trustees and management need to seek professional advice early, ideally from a charity turnaround specialist, and plans and forecasts should be revisited, both covering the short term cash positions but also medium to longer term objectives.

    Key performance indicators should be set for effective decision making, including a review of the reserve policy to provide for that rainy day, and there should be a review of the overhead structure, bearing in mind that reductions can have consequences on working capital requirements.

    If there are concerns about corporate governance, the trustees and management should review internal processes and implement new reporting structures as appropriate. When assessing forecasts, both of expansion plans and for more ‘challenging’ times, management should undertake a risk sensitivity analysis so that they understand the ‘what if’ scenarios.

    With new ventures, they should consider the escape routes should the project not go to plan. While one never plans for failure, any prudent organisation needs to understand its exit strategies.

    There are opportunities out there. While you may feel the charity needs to batten down its hatches, don’t allow it to retreat to the extent that new opportunities are missed.

    Trustees need to be aware of their obligations, whether facing trouble or opportunity: understand the decision needed, ensure they have adequate information and consider stakeholders and draw a logical conclusion. Above all, they should record not only ‘what’ but ‘why’.

    Finally, and perhaps most importantly, they need to base decisions and forward management on sound financial and business plans.

    Sound information and analysis is vital to understanding trends and opportunities. Robust and accurate forecasts help management maintain credibility while managing both trustee expectations and those of other stakeholders. They also enable the charity to manage its cash flow more effectively, often a scarce or expensive resource during a recession.

    Whether faced with threat or opportunity, charities must tackle the issues posed in these challenging times – not hide but plan carefully and act accordingly. A realistic, open-minded and risk-aware rather than risk-averse approach to financial management and growth is a duty of trustee boards and charity managers. We can assist these organisations in achieving their long-term objectives and survival in the current economic climate.

  • About the authors

    Karen Spears is a Restructuring and Recovery director, based in Watford. She has considerable experience in all types of insolvency, particularly advising trustees and management in the not-for-profit sector. Her assignments in this sector include mergers, insolvencies and orderly wind downs.

    Jim Clifford is a Corporate Finance partner, based in Watford, who leads Baker Tilly’s strategic planning and M&A services for Charities and Education sectors. He has over 25 years’ experience in advising charities and in charity management.