Restructuring in the charity and not-for-profit sector: A change of perspective?
Separately, there has been pressure on charities to reduce back office costs and an increasing expectation that all money donated should go to the ‘frontline’. The result has been further pressure on charities’ viability and sustainability. Charities clearly cannot operate unless their core costs are met. The importance of unrestricted income for many charities, which can be used flexibly by the organisation is therefore vital. Reserves are also much more than a statement about the health of the charity. A robust reserves policy is more important than ever before. Based on an extrapolation from the charity commission annual returns, many charities do not know the true position of their reserves, which may result either in the unnecessary retention of funds or an inadequate assessment of the going concern position. Having recently been involved with a Fairtrade development charity that also carried out related commodity trading with the intention that any profits would be reinvested into its charitable activities, it was clear that the operating margin was insufficient to deliver a viable business and that margin improvement and cost reduction measures would be required to deliver both a sustainable business and an appropriate level of reserves.
Management/Trustee Board interaction
The strong emotional attachment to the aims of the organisation is both a blessing and a curse as this commitment can mean that there is a reluctance to make the difficult decisions to restructure the organisation until it is too late, with the belief that the funders will not allow the organisation to fail or that a contract renewal will be secured. This sense of commitment to the mission and culture of the organisation can also prohibit mergers/takeovers despite this being a common tool to help address financial difficulties by the pooling of resources. There were only 81 mergers involving 154 charities taking place in the year to March 2018, less than one in every thousand charities. 7 Similarly, the use of outsourcing particularly to provide skills that the organisation cannot source internally or cannot justify recruiting full time staff (e.g. finance, HR and IT) is an area that needs more strategic focus as can provide substantial benefits both in terms of cost and productivity. The role of Trustees is vital, as they need to provide both the strategic direction to ensure that the charity meets its purpose, act as the guardian of its values and reputation and also steward its assets and finances. The interaction (or lack of) between the Trustee board and management is an area of key focus and the ability of the Trustee board to meet quickly, regularly and take the necessary actions is vital.
Pensions
Part of the social compact with staff was that whilst pay may not be as much as private sector organisations this was compensated by generous pension provision. On a practical basis this was also required in order to compete for staff who may have otherwise worked for local or national government and enjoyed defined benefit pension scheme provision. Historic liabilities of defined benefit pension schemes continue to pose a significant challenge to the charity sector. Liabilities can undermine a charity’s financial sustainability as well as posing as a reputational risk. Many charities that have their own defined benefit schemes and have sought to minimise future risk by closing them to future accrual but pension deficits and their management can be one of the major challenges to the viability of a charity but there are options available to help address these deficits.
A suitable reserve policy
Charities have always faced challenges in funding their core costs. However, this has been exacerbated by the move towards contract funding, which is often tightly defined and does not allow for costs incurred outside the specific terms of the contract or only allows a small percentage of the contract costs to be utilised for overhead.
Notes
7 Eastside Primetimers, A review of not-for-profit mergers for 2017/18 <www.ep-uk.org/wp-content/uploads/2019/01/Good-Merger- Index-2017-18.pdf>, 8 November 2019.
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