Insolvency and the charity sector

Administration, bankruptcy, and winding-up are all terms linked to insolvency. The UK Government explains that insolvency is a failure resulting in:

• The charity can’t meet its payment obligations when they are due
• The value of its debts exceeds assets

In simple terms, insolvency means that the charity is not able to make payments on time, or at all. From a practical perspective, the organisation’s operations are in jeopardy.

 

Administration and winding-up are terms used to describe procedures.

 

UK Government says: “During administration you must hand over control of your company and everything it owns (its ‘assets’) to your administrator.”

 

This means that the charity is being ‘run’ by a third-party administrator. The administrator notifies and makes agreements with creditors. Winding-up, as part of this process, is the sale or disposal of any remaining assets.

 

 

Entering the twilight zone of bankruptcy

 

The pandemic coupled with the cost-of-living crisis are putting extreme strain on charities. Demand for services are skyrocketing while the cost of running operations has leapt up from inflation.

 

Raleigh International, an aid charity has already declared its immediate bankruptcy. Reported by UK Fundraising Magazine, the charity stated that: “Regrettably, the combination of dramatically reduced funding and foreign aid, plus the legacy of two years of delayed or cancelled programmes, due to the COVID-19 global pandemic and its associated overseas travel restrictions, have had an irreversible impact.”

 

Sadly, for Raleigh International the conditions of operations were too difficult to bear.

 

There are other cases of charity bankruptcy that stem from more nefarious activities. Like Kids Company, Salvation Proclaimer Ministries Limited (also known as SPAC nation) wound-up.

 

Fraud and mismanagement plagued both charities. While Kids Company was well publicised, SPAC Nation hasn’t been in the headlines.

 

But the reasons for bankruptcy were the same – fraud and mismanagement of charity funds.

 

HMRC reported that: “Further enquiries found that SPAC Nation either failed to comply or only partially complied with statutory requirements, including providing data to support claimed donations, and accounting records in support of £1.87 million of expenditure.”

 

Clearly, bankruptcy isn’t just about poor macro-headwinds. It’s also about management standards.

 

 

Tech strengthens controls and identifies problems

 

Checks and balances are the start of good financial governance. Tech can give trustees more visibility and control over their fiduciary responsibility.

 

Here our top tips to prevent insolvency with digital.

 

 

Invest in a financial management platform

 

One of the best ways to spot financial difficulties is by using a financial management platform. They enhance transparency by providing budget estimates, accounting, and back-office functionality. The most powerful services enable oversight. Controllers can reconcile bank account entries with expenses, so they know where funds are being directed.

 

For those starting out, Xero and Zoho work best for less complex operations. Both platforms are HMRC-approved software packages.

 

 

Use cyber-security software

 

Protect your charity from malware and hackers by keeping your cyber-security up to date. As part of the cyber security program, limit access to sensitive areas and ask staff to change passwords on a regular basis.

 

Endpoint Protection Systems take care of hybrid working arrangements. The process includes using the usual cyber-security software, along with intrusion detection, data protection loss, and firewalling

 

 

Have sound financial management in place

 

Financial protocols are the crux of ensuring that a charity stays afloat. Our top tips for financial management include having processes and procedures for decisions.

 

Second, checklists work well to make sure that authorisations are in place. Build in checkpoints to monitor and review budgets against spending.

 

 

Perform financial audits

 

Spotting trends on an every-day basis is challenging. Small changes might not be detected but build up. That oversight can result in missing trends.

 

Performing an annual audit ensures that finances are on track and that anomalies are investigated. Check in with the Charity Commission. There’s an option to either do a light-touch review or a formal audit.

 

Next, hire an independent, qualified auditor. The advantage of going through the process is that the entire function, from policies to the accounts are scrutinised.