It's a tough world out there, so get some good advice

Boards must ensure they understand the financial parameters of their decisions, says Peter Gotham, principal at MacIntyre Hudson

Peter Gotham
Peter Gotham

I have just come back from a holiday in Alaska, which reminds me of how tough life can be. Times of structural change provide opportunities for aggressive predators, whether it's Henry VIII and the dissolution of the monasteries or the economic restructuring Margaret Thatcher sponsored.

The sector is now more aware of the risk posed by asset-stripping vultures or smooth-talking 'advisers' whose primary aim is to feather their own nests. But boards must ensure they understand the financial parameters of their decisions, which are often more complicated for charities than for commercial companies, so they might need to seek sound advice.

Overspent funds

Recently I have come across several instances of boards that fail to understand their financial position or the likely effect of adopting the recommendations of financial advisers.

In one case, the board was used to preparing management accounts that correctly showed the restricted fund balances. These sometimes included overspent funds, on the basis of future fundraising, or support from what had often been significant unrestricted funds. This habit had not changed, but the fundraising climate had worsened and the unrestricted funds had declined. In effect, the negative restricted funds were part of the unrestricted reserves, and made these negative. The charity had unknowingly drifted into an insolvent position.

Another example was a charity that had land and buildings of significant value, but these were either not commercially saleable at their value in the accounts, or had covenants about their use that reduced the value in a crisis.

Charities need professional advisers if they are to understand their position - or rescue some of the mission delivery if the charity has to close. One board I know of had been advised that a company voluntary arrangement suited its wish to rescue the charity. A CVA is basically an arrangement with the creditors to pay them a portion of their debt in return for them agreeing to write off part.

In this case, the proposed deal was that an up-front fee would be paid and the charity would pay a portion of any fundraising to the creditors. At first sight this seemed a great option, until you realised that funders that had already proved reticent would not be likely to fund a charity with such an arrangement - and that the insolvency practitioner would take the first part of any contributions.

Collaborative behaviour

Some northern wildlife has a survival strategy that relies on collaborative behaviour - and the sector is normally good at that. Umbrella bodies can provide help in identifying good sources of advice.

It is a pity, therefore, that the government does not seem to see the benefit of these organisations. Over the years these bodies have performed a great service in assisting collaborative initiatives and advising their members. This could help charities avoid some of the problems that we will see reported over the course of this period of crisis.

Peter Gotham is a principal at MacIntyre Hudson

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