Paula Sussex, chief executive of the Charity Commission, has warned trustees against sticking their heads in the sand when faced with financial difficulties.
Her comments come as two commission reports, published this morning, warn that charities that take early steps to identify and deal with financial difficulties will manage those difficulties better than those that do not.
The two documents consist of a group case report of the regulator’s work with 10 charities that had shown signs of financial distress and a group monitoring review of the accounts of 94 charities where auditors had flagged concerns. All the charities in both reports had incomes of more than £1m a year.
The reports are part of the commission’s ongoing project to examine the financial resilience of the charity sector and identify lessons for charities that might be struggling financially.
Both documents conclude that early steps to address financial difficulties and confront them pragmatically minimise the risk to beneficiaries.
They also found that charities have a range of options to help them achieve their aims in spite of financial difficulty, such as mergers and collaborations.
Sussex said: "The economic reality for charities across the UK is a challenging one. But trustees will better serve those they need to support by exploring mergers and collaborations, diversifying income streams or taking other steps to manage those difficulties at an early stage.
"A head-in-the-sand approach raises concerns about the ability of trustees to run their charities effectively. Charities should not take unmanaged risks, but the risk of doing nothing is only too real and the consequences can be devastating, particularly where vulnerable beneficiaries are involved."
In a statement published today, the commission said the reports marked the start of a commission campaign to communicate lessons and information to charities to help them deal with financial difficulties, which it said would also include working with sector bodies and experts to update its guidance and become more accessible.
For the group monitoring review, the commission identified 94 charities with incomes of more than £1m a year whose auditors had included an "emphasis-of-matter" paragraph, which signalled they were worried about whether the charity would remain a going concern.
The regulator reviewed the accounts of these charities to assess the reasons why they were in financial difficulty and what action trustees were taking.
As a result, said the commission, 57 of the charities had filed a more recent set of audited accounts and 14 had improved their financial positions, but five were no longer considered going concerns by auditors and nine had ceased to operate.
Five of these charities, plus another five the commission thought might be in financial distress, were included in the group monitoring case, where the commission carried out more detailed monitoring and compliance visits.
The reports said the future outlook for charities remained challenging, so trustees should stay alert to the risks of financial distress and manage them actively.
Sussex said: "The commission cannot save individual charities in financial distress, but we are alert to the risks facing charities in the current climate.
"We have a responsibility to ensure trustees have the right tools at their disposal to tackle these issues head on and will work with charities to improve our financial guidance and its accessibility to trustees in the coming months."