Being ready for the unexpected

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Your charity has survived the recession and probably emerged stronger than ever thanks to sensible financial planning, a tighter rein on costs and a clear fundraising strategy.

Although it may be tempting to believe that with the worst behind us your charity is safe, have you considered what else could come out of the blue to threaten its operation or the assets that your charity's trustees are duty bound to protect?

Many charities at some point will face potential threats in the same way as commercial businesses. Those threats can to a large extent be managed through forward planning, early recognition and seeking out professional advice before it's too late.

"Scenario planning" should be high on your list of priorities as a first step to protecting your charity.

Here are some examples of potential threats to charities – and how you can best plan to avoid and overcome them.

Withdrawal of government support

The scenario: If your charity is mainly dependent on government funding and statutory income, the withdrawal of a grant or contract for services could have a terminal outcome.

While there would be some warning of this, it may well be that other income sources - such as through fundraising or other charitable or non-charitable income generation, or even through an emergency appeal or by setting up a non-charitable trading activity -could generate enough replacement income quickly enough.

How to avoid this scenario

Charity trustees must assess their cash reserves and spending plans to work out whether there is a sufficient contingency for such an event. If not, the trustees should seek professional advice as to how they might generate a contingency fund or scope out how replacement funding streams could be secured at relatively short notice and whether any costs savings could exist, if needed.

Charities are allowed to carry reasonable and justifiable reserves against contingencies and charity trustees should consider adopting a reserves policy that clearly sets out their approach.

Consider how the charity could come up with funds at short notice and if appropriate, rehearse a theoretical "what if" strategy ahead of the income stream being pulled. If it is possible to establish diverse sources of alternative income, this could protect the charity from an insolvency outcome in the event that a major source of funding stops.

Key to the charity's survival will be adaptability and charity trustees should think ahead about new and innovative ways of generating income to enable them to deliver their charitable purposes.

Departure of key management

The scenario: When key members of management have to move on for any number of reasons (including that their set term in office is due to lapse), this can be a major problem on a practical level. If the executive management of the charity is carried out by its charity trustees, this can also have significant impact on a legal level, if it will leave the charity with insufficient charity trustees as required by the charity's governing document.
How to avoid this scenario

Succession planning must be carefully managed at key levels. The charity's governing document should be checked to ensure that everyone is aware of the minimum number of trustees needed by it and so that there is an appropriate strategy in place to deal with the replacement of departing trustees. Many charities use a system of rotation at board level to ensure continuity of knowledge and leadership.

If the governing documet does not have adequate provisions for replacing trustees, charity trustees should act now to update their governing documents, trustee recruitment, selection and induction policies and procedures. Specialist legal advice should always be sought as soon as you are aware that there could be a problem.

On a practical level, consider ahead what disruptions and reputational impact there could be to the charity if key management were to leave and how the changes could be best managed and communicated with staff, volunteers, significant funders and other stakeholders.

A pension deficit emerges

The scenario: A pension deficit can unexpectedly arise for a charity, particularly one that is in a multi-employer defined pension scheme where the number of employees suddenly reduces below the minimum threshold. This could be because of retirement, resignations or redundancies. Even if the charity's short term cash flow is not affected, the pension deficit could render the charity insolvent on a "balance sheet" test whereby its assets are insufficient to meet all of its actual and anticipated liabilities.
How to avoid this scenario

Charity trustees and the senior executive team should be aware of proposed triggers under a pension scheme and as far as possible plan the charity's business strategy around such potential events. However, if a pension deficit exists or suddenly becomes anticipated, the charity trustees should immediately seek professional advice from an insolvency specialist to determine the circumstances in which the charity can continue to operate and also to protect their own position.

Directors of charitable companies will have to take care not to trade beyond the point that they knew or ought to have known that the charity could not avoid insolvent liquidation. Similar rules apply for trustees of charitable incorporated organisations.

Personal liabilities may arise for charity trustees of unincorporated charities which do not have the advantages of a limited liability corporate structure to protect them from the financial implications of insolvency.

The deficit may be managed through cash contributions but charity trustees will need to financially plan for potential increases. In some cases a coordinated restructure of the charity will need to take place with the right professional advice. It is important that charity trustees have a clear plan for dealing with the pension deficit and be ready to communicate that in their Trustees' Annual Report so that donors and beneficiaries remain reassured.

The "unexpected" incident

The scenario: An accident or incident could strike a charity at any time which could result in a claim against the charity for losses to third parties, damage to the charity's property or even its reputation when caused by a scandal or bad publicity. The type of threat will depend on the charity's activities and the day to day issues that it faces.
How to avoid this scenario

Charity trustees should frequently carry out a thorough risk assessment of the charity's activities and assets in order to establish what risks could lead to damage to charity property, its reputation or losses to third parties which could ultimately threaten the viability of the charity's operation.

Where appropriate charity trustees should take professional advice as to how to manage such risks and, in particular, trustees of unincorporated charities will need to consider their exposure to personal liability. Unless its governing document expressly prohibits this, the charity will be able to take out specialist charities' insurance if the payment of the insurance premium is reasonable and can be justified in the charity's interests.

There are other types of "unforeseen" incidents which could threaten a charity on a reputational basis but which the charity isn't or can't be insured against. Charity trustees should make sure that they are ready to act in a responsible and quick manner and with the right professional advice on the unfortunate occurrence of such an event. In order to prioritise their needs, it may be possible to maintain services to beneficiaries through a merger or collaboration with another charity, for example.

The "unexpected" funding freeze

The scenario: Certain threats to funding simply cannot be foreseen by a charity but would seriously threaten its operation. Take for example the sudden collapse of the Icelandic bank Kaupthing, Singer and Friedlander, which in 2008 resulted in a number of large charities not being able access its significant cash reserves to carry out their day to day functions.
How to avoid this scenario

Sensible planning should be undertaken so that charity trustees are aware of how their cash reserves and resources can be utilised at short notice and whether there are any restrictions placed on funds.

While affected charities are unlikely to be criticised for not having planned for such an incident, charity trustees and members of the senior executive team should on a "scenario planning" basis consider that if a sudden funding freeze was to strike, what would the charity trustees' strategy be to manage the crisis, how would they access alternative funds and where would they seek advice as soon as it happened.

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