Supporting charities
These are troubling times for the third
sector. Like everybody else, charities are feeling the pinch of the
downturn – they are feeling it particularly keenly, in fact, as
charitable causes tend to be among the first to suffer when belts are
tightened. Professional services firms should be alive to the
implications of the situation.
The problems are wide ranging. Charities have several traditional income streams, and all are currently seeing a reduced flow:
• Legacy income – as people live
longer and spend more on care fees in later life, there is less
money available for bequests
• Voluntary income – individuals
worried about their own financial situation are less inclined to
give away money
• Corporate and foundation support –
the same holds true as above, and support has been restricted in
most cases
• Investment returns – the chaos
in the financial markets has meant many relied-upon returns have
fallen drastically
• Trading income – charities which sell services
are seeing the same increased pressure on their operations as
commercial operations
• Government funding – whether
through local or central government, through contract, grant or
service level agreement, spending is under review
All this adds up to the troubled situation of today, where restructuring, mergers and insolvencies are becoming much more frequent.
'The situation is probably most worrying for the charities who rely on public sector money,' comments Malcolm Cohen, Partner in Business Restructuring at BDO. 'They operate in areas like health, childcare and social development, effectively working as contractors for the government.
'Some have already been formally told that their funding is being pulled, and others are funded by the quangos that are being culled, which amounts to much the same thing.'
The consequences for these charities are, not surprisingly, extreme; and difficult decisions are being made. Some have made contingency plans for huge drops in income, while others are coming to terms with having spent large amounts on projects which have subsequently been cancelled.
Indeed Andy Beckingham and Malcolm Cohen were recently appointed as Joint Administrators of Refugee and Migrant Justice ('RMJ') on 16 June 2010. This charity operated from 13 offices in England and employed over 330 staff under the governance of its Board of Trustees and management of its Executive Board and, at any one time, represented around 10,000 asylum seekers and victims of human trafficking.
The Charity was incorporated with the objective of securing justice for asylum seekers and other migrants in the UK who sought protection or needed help to secure their human rights under UK law. The Charity operated as a not-for-profit organization and helped clients who qualified for legal aid and was, therefore, primarily funded through legal aid contracts with the Legal Services Commission (‘LSC’) as well as donations.
The Charity encountered cash flow difficulties due to a change in legal aid funding policy which served both to reduce and delay payments for work conducted and through not obtaining enough new matter starts.
'Many charities tend in any case to have thin balance sheets,' Malcolm points out. 'They are there to use money rather than accumulate it. Even those running major projects will usually be working with very small margins, and the loss of a contract can have terminal consequences.
'Insolvency specialists are busy,' he continues, 'although sometimes there is scope to consider an emergency merger with another organisation working in the same field to maintain operations on some level.'
Professional advice can also be invaluable for charities when it comes to fully understanding their financial position, both in terms of getting a clear picture and also in identifying possible lifelines. As Malcolm explains, 'We might examine the books and see that a charity hasn't claimed the tax to which it's entitled through Gift Aid, for example, and we'll help them to sort it out. Or we might be able to work on ways of varying the terms of charitable trusts to unlock money that could previously only be used for restricted purposes.'
While it would be misleading to say that the whole charity sector is in crisis, it is certainly true that many charities will benefit from professional advice in the current conditions – and this is an area that shouldn't be neglected. 'We'd advise law firms to make sure they're in contact with their charity clients, and to be aware that there may well be areas in which specialist advice can be invaluable,' concludes Malcolm.
