….when we can’t use our reserves, we can’t know how long this situation will last, and the Government support schemes may not help or may just come back to bite us.
These are real questions we’ve been hearing from clients and other friends in the social sector – some charities and some not. If we can’t forecast cash reliably, how can we assess whether or not we are trading solvently. It we can’t use our reserves and must leave them intact, how can we fund operations through this tough period ? We might watch operations collapsing whilst a pool of cash sits out of our reach. If we shy away from Government support, we might be burning a lifeline. So what are the answers ?
First of all, it is appropriate in certain circumstances to dip into reserves to support current cash needs. We should:
- Recalculate reserves if underlying assets have devalued, so that we know what we have to work with.
- Plan forward to use reserves (including both unrestricted, designated and restricted, in that order) selectively and to replace them from ongoing operational surpluses once things stabilise.
- Accept that the leeway offered by the Government in wrongful trading, and the directors responsibility for it, is helpful but won’t last for ever, and we must get back to a stable position where creditors are not at risk as we come out of this protection.
Secondly we can in most cases forecast to an acceptable degree of reliability. We should:
- Rebase the budget for COVID factors, so re-set the previous budget, to reflect a sensible base forecast that can be a reasonable target against which to compare what actually happens. If we don’t, we’ll constantly be saying “yes, but it isn’t like that…” rather than assessing what is going right and wrong against a sensible baseline.
- Consider scenarios, and establish that our forward plan looks sensible in all of them. This involves a planning process of developing four ‘worlds’ each one of which may happen, which are mutually exclusive (we’ll ultimately find ourselves in one or another, not more than one), and which leave no material gaps between them. The forward plans are framed in these ‘world’ views, and the organisation’s response can be seen in those contexts.
Thirdly, the Government support does genuinely offer something valuable, and if that value fits we should take it.
At the time of writing this we haven’t heard the detail of how the additional £750m into the sector will be distributed, but VAT deferral and Time to Pay (PAYE and NIC) provide additional working capital, but will have to be repaid, so that needs to be planned into the cashflows. Furloughing help is effectively a grant, and if it fits to your circumstances, it should be used. It will reduce the effect to which reserves are consumed by periods of low income and high staff costs, or avoid the necessary laying off of staff so reducing our ability to resume operations once lockdown and its aftermath are over. The additional borrowings from banks need to be approached carefully. Whilst some relaxation of rules (such as wrongful trading) has been made, they are being offered under commercial terms, and the obligations to test whether secured borrowings are able to be serviced and repaid under s.124 Charites Act 2011 still apply, so Boards should be wary of taking on debt that looks unsustainable in one or more of the scenarios used in planning.
There really is more flexibility than first appears, but care and planning are needed, and these must be delivered at speed given the suddenness of the changes we are facing. It is more than one charity that has ‘bravery’ as one of its values, and rightly so. This is probably the time for displaying that value, with a solid underpinning of analysis and care, as “fortune favours the brave”, and we have an even greater mission to fulfil in this new world.