Last week's announcement that local authority spending cuts will force 2,000 charities to close comes at a time when the third sector is already feeling the coalition government's austerity measures biting hard.
For most organisations in the third sector it is a constant and often uphill battle to raise the funds necessary to deliver services, with many relying on grant funding, donations and legacies. Regular funding streams from local authorities are also drying up which places an additional burden on already stretched and tightly managed resources.
With the sector in such turmoil, are there ways that businesses can "manage" their way out of this latest round of cuts, and if so what steps do they need to take? If closure (forced or voluntary) is the only option, what does this mean for the services and the beneficiaries receiving those services? Are there opportunities for services to continue, albeit in another guise?
Although there are no quick and easy fixes, it needn't be all doom and gloom. There are steps that organisations can take to help them overcome some of the problems they face.
Of course, some organisations will find themselves going through a period of transformation, and some may even fall by the wayside. But looking on the positive side, there will be others that will survive and which will come through stronger for having gone through the process.
So what measures do third sector directors and trustees need to be thinking about?
1. Take the first step
When faced with any problem, the first step is to acknowledge it and not bury your head in the sand by taking the "ostrich" approach. We have helped numerous organisations through the process of business recovery. Where this hasn't been possible, we have helped them to close their businesses in a way that has made the process easier to manage.
I'm pleased to say that even when businesses have faced closure, we have managed to salvage something from the wreckage, and have worked closely with charities and voluntary organisations to find ways of continuing their valuable services – albeit some of these being under a different company structure or by transferring services to other organisations.
2. Early action
Early action is by far the best policy to follow, and in many cases can avoid problems becoming terminal.
3. Develop a plan of action
If your main funding stream has suddenly been reduced or disappeared altogether, some form of planning will be inevitable, whether this is to rescue the business or to take the difficult decision of closing.
Strategic planning: A sudden fall in income streams will affect the whole organisation, its service delivery and its beneficiaries. The vision and mission for the business could well be left in tatters and may need to be reviewed and revised to reflect current market conditions.
Financial planning: With income streams falling, the need to understand future cash requirements and a robust and accurate financial forecasting system are essential. A vital part of this exercise is to identify the restricted and unrestricted funds to ensure each are ringfenced and there is no misuse of funds, however well meaning. Careful use of reserves to maintain services and develop new revenue streams can be the key to survival.
Reviewing costs will also form part of the financial planning: Costs come in two types – fixed, such as staff and property costs and variable, such as travel, training, printing,postage,stationery etc. In the short term it is easier to cut the variable costs than the fixed costs but all costs need a line-by-line review to identify where savings can be made.
Fundraising strategies will need to be scrutinised and income streams may need to be replaced: Financial strain will inevitably lead to a flurry of activity to source new revenue streams. It is essential that fundraisers and finance directors work together to develop a coherent strategy using funds to develop partnerships with donors and supporters. A focus on donor retention can be the most cost effective use of limited resources.
4. Strong leadership and governance
During stressful periods, directors and trustees must show speed of understanding and strength in decision-making. They must be prepared to oversee the implementation of policies that in better times would not have been contemplated. This is no time for sentimentality; the long-term future of a charity will depend on the leadership qualities shown by its senior management team.
5. Seek professional advice
There is no shame in seeking external advice in difficult economic times. Many fail because those at the top believe they have all the answers. For many directors and trustees this will be the first recession where they have had to make key decisions. Receiving outside help from experienced advisors can provide trustees with the necessary knowledge to make informed educated decisions.
Case study
A care home provider based in Coventry and in the West Midlands was advised by Cranfield Business Recovery at a time when their finances needed to be re-structured as their business was facing closure. The company, which is a registered charity, was facing closure as it was unable to pay its debts and HMRC were threatening to wind up the company.
On the advice of Cranfield the company entered into a restructuring arrangement with its creditors. The company agreed to repay its debts over a three-year period, which enabled them to stabilise cash flow by spreading the burden of the outstanding creditors over a 36-month period. As part of the rescue package, two new trustees were also recruited to provide guidance to the charity and strengthen its leadership.
The company overhauled its accounting procedures under the guidance of its accountant and underwent a full review of its costs to maximise its effectiveness. The main benefit of entering into this formal arrangement was that the company was able to continue to trade, it remained under the control of its trustees and continued to undertake the good work that it provides for the local community.
The company honoured its formal agreement over three years, settled the claims of its outstanding creditors and continues to operate as a care home provider. As reported in previous articles, they like many others are still not immune to the current economic difficulties being experienced in the care home sector.
Tony Mitchell is managing director at Cranfield Business Recovery, which offers advice to third sector companies about how to survive the drastic cuts in funding.
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