Fight the downturn by being prepared

Ian Oakley Smith on why poorly managed charities fail first

As a licensed insolvency practitioner over the past 10 years, I have worked with many charities that have got into financial difficulties.

Some of these have been able to survive; others, sadly, have had to be wound up. This experience has led me to one obvious conclusion: poorly managed charities fail first.

In a benign environment, charities can often get away with poor management and governance. Arguably, funds have been easier to generate in recent years, so emergency campaigns and more predictable income streams have sometimes helped charities to absorb mistakes and continue operating. In less predictable times, though, management needs to be strong to weather reductions in income and increases in costs.

In my view, the key to good management in the current environment is to really understand how the charity will respond if income and costs change suddenly. This will take some time, but is a crucial factor in avoiding a crisis if negative changes occur.

First, ensure your charity keeps accurate and detailed management information. Without this, trustees could end up taking limited or inappropriate action. It is no coincidence that most of the charities I have worked with over the years had limited financial information that failed to highlight problems early enough.

Assuming reliable information is available, trustees should consider which income streams might be vulnerable and which costs might increase - fuel or wages, for example. Detailed plans should be developed against various scenarios. This way, trustees will understand what options are available to the charity if these changes occur and can agree what action is necessary, both immediately and in the future.

The importance of gaining agreement between the trustees before a crisis hits should not be underestimated. Difficult decisions might have to be made, and trustees may need to be brave in the long-term interests of the charity.

Some decisions may need to be pre-emptive, such as cutting costs or activities now in order to be in a position to survive a future downturn. Such decisions may be unpopular, and some trustees may have trouble understanding their long-term benefits. But if a charity waits until events have unfolded, there will not be time for the trustees to assess the position.

These recommendations are simply a reflection of best practice in any climate; but the absence of best practice is more likely to be exposed in difficult and unpredictable times.

- Ian Oakley Smith is a director in the Business Recovery Services team at Pricewaterhouse- Coopers.

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