Guidance

Improving your charity’s finances - what to do if your charity is in financial difficulty

Updated 23 September 2024

Applies to England and Wales

• Publication for Northern Ireland
• Publication for Scotland

Having a clear picture of your charity’s finances is essential. It means you can understand if your charity has enough funds for what it plans to do and consider options for improving your charity’s finances. It will also help you to spot any problems early on.

If your charity is experiencing financial difficulties, or you know that funding that your charity relies on will reduce or stop, you as trustees will need to consider:

• the impact it could have on the charity, and
• whether your charity has become, or could become, insolvent

Insolvency is complex and what it means depends on your charity’s structure. In simple terms, your charity may be insolvent if either it cannot pay its debts when they are due, or it does not have enough assets to cover its liabilities.

If you think this applies to you, read guidance about insolvency for companies and CIOs or unincorporated charities.

If your charity is not insolvent, or at risk of becoming insolvent, read this guidance to understand what actions you can take to help you improve the situation.

You will also need to more regularly review your charity’s finances and operations. This will help you check that:

• your actions are making a difference and your charity is recovering and is able to continue operating for the foreseeable future (known as a ‘going concern’), or
• your charity’s financial situation is not getting better, or
• your charity’s financial situation is getting worse

If you prepare SORP based accounts you must keep under review whether your charity is a going concern and you must confirm this in the charity’s accounts.

Managing your charity’s finances

It is vital that as trustees you understand and manage your charity’s finances. This will help you comply with your trustee duties, including your duty to manage your charity’s resources responsibly, act in its best interests and with reasonable care and skill.

Even if your charity has an expert to manage its finances, every trustee is still jointly accountable for understanding and managing your charity’s financial position and performance.

The earlier you can identify that your charity is in financial difficulties, the quicker you can act to protect your beneficiaries. All trustees should have access to clear, accurate and up-to-date financial information. Your charity’s financial position and performance should be a standing agenda item at trustee meetings and sent to each trustee before the meeting.

To help you meet your legal duties it is important that you regularly monitor your charity’s finances to make sure that:

• your charity’s money is protected and only spent on furthering your charity’s purposes
• you comply with any restrictions on using funds or you follow the rules to change the restrictions
• you have enough money to carry out your charity’s activities and to pay its bills when they are due
• you can identify any financial difficulties at an early stage and agree what to do about them
• if your charity is facing insolvency or is insolvent, you take professional advice as soon as possible to ensure you follow the correct legal procedures
• if you decide it is necessary to close your charity, you plan for an orderly closure

Actively managing your charity’s finances means, for example:

• reviewing the charity’s cash position and cash forecast to understand if the charity is predicted to be able to pay its debts as they fall due
• reviewing the charity’s budgets and business plans
• having the right financial controls in place for your charity. Read our guidance about this and use our financial controls checklist to help you do this
• reviewing and managing the financial risks to your charity
• taking professional advice before making any significant financial commitments, such as buying property or borrowing money. This is vital if you are a trustee of an unincorporated charity because there is no limited liability and you can be personally liable for the charity’s financial commitments
• reviewing the level of your charity’s reserves and reserves policy so that they remain appropriate for your charity

Use our 15 questions trustees should ask to help you review your charity and help you plan and make decisions about its future.

Check if your charity is in financial difficulties

To help you work out whether your charity is experiencing financial difficulties, you need to have an accurate picture of:

• how much cash the charity has 
• cash coming into and going out of the charity over the coming weeks and months, known as a ‘cashflow forecast.’ The cashflow forecast should allow you to work out if your charity is at risk of running out of cash and when this will happen
• your charity’s assets and liabilities, known as a ‘balance sheet.’ Using a balance sheet will help you understand what available assets your charity has 

The next section sets out ways in which you may be able to improve your charity’s situation and avoid insolvency.

Use our checklist to help you understand if your charity is at risk of becoming insolvent.

Actions you can take to improve your charity’s finances

Once you know that your charity is struggling financially but is not insolvent, you will need to monitor your charity’s finances more regularly and think about what you will do in response.

You should take expert advice on your options. For example, from:

• your independent examiner or auditor
• any network or membership body to which your charity belongs, for example Charity Finance Group
• an insolvency practitioner 

Keep a record of any advice you receive and the reasons for the decisions you make. Your decisions (whether short or long term) must be in the charity’s best interests. Use our decision-making guidance to help you.  

It is likely you will need to take into account a number of factors, such as:

• what the charity can afford
• how the charity can reduce costs in order to continue providing services to current beneficiaries
• the extent to which current services to beneficiaries need to be reduced
• the charity’s options for raising further funds, and how quickly it could get the funds
• how the charity may need to operate in the future if it cannot raise the level of funds it needs

This may mean making decisions for the short and long term.

Depending on your timescales, you may want to get the views from others, such as your beneficiaries. However, the final decision will be for the trustees to make. Where you are making changes that affect beneficiaries, volunteers or staff, you should inform them about the changes.

Minimising costs

Think about whether you can minimise your costs, such as by:

• pausing or stopping non-essential outgoings, taking into account any cancellation costs
• reducing administrative costs and costs of running services for beneficiaries, for example through the use of technology
• reducing or stopping some of your charity’s services and referring beneficiaries to another charity
• teaming up with another charity with similar purposes to share facilities or resources
• speaking to your charity’s lenders for help if your charity has loans. For example, about extending loan periods

Looking for additional sources of income

Consider looking for additional sources of income. For example:

• contacting the charity’s supporters to ask if they can increase their regular donation or make an additional one-off donation

• launching a fundraising appeal. Make sure the funds raised can be used by your charity for any of its purposes. Read our guidance about this

• speaking to the charity’s existing funders
• applying for grants from foundations
• discussing the charity’s situation with your bank

Reviewing your charity’s funds and assets

Review your charity’s funds to see whether any can be released by, for example: 

• changing your plans for how you use any general funds or assets that you had set aside for particular projects. General funds or assets are those that you can use in any way to further your charity’s purposes; they have no other rules (or restrictions) on how they can be used
• using your charity’s reserves
• using legal powers to borrow from or spend permanent endowment
• selling some of your charity’s assets, for example land or investments

Where your charity has permanent endowment, designated land or special trust funds, you may be able to use legal powers to remove their restrictions so they can be used for your charity’s purposes.

Designated land is land that must be used for a particular purpose of your charity according to the document that explains how the land must be used. For example, property which must be used as a recreation ground.

Permanent endowment is property that your charity must keep rather than spend. Property given to your charity that must be used for a particular purpose (such as designated land) is one example of permanent endowment. Another is money or other assets given to your charity for investment where only the investment income can be spent. Read our guidance on permanent endowment.

A special trust is money or assets that your charity must use for specific purposes that are narrower than your charity’s purposes. Permanent endowment can be a special trust but not always.

Some activities may incur fees or costs, for example selling assets, borrowing money or making redundancies.

If you are thinking about borrowing, you must have the power to borrow. Most charities have the power to borrow, either a statutory power or in their governing document. If you are not sure, you should take professional advice.

Some governing documents contain rules against borrowing, so make sure you check your charity’s governing document.

Closing the charity and other options

If you can improve your charity’s financial situation and you are certain your charity is not insolvent, or at risk of becoming insolvent, you could decide to:

• continue operating

Check if you have done enough to minimise the risks of your charity experiencing the same situation again. Use our 15 questions trustees should ask to help you review your charity and help you plan and make decisions about its future.

• merge your charity with another

Read our guidance if you are interested in merging. 

• close your charity

Read our guidance about closing a charity to follow the correct process.

You must tell the Charity Commission your charity has closed so we can remove your charity from the register.

If you have not improved your charity’s situation, or the situation gets worse, check that your charity has not become insolvent or is at risk of becoming insolvent. There are legal processes charities must follow. Read:

• What to do if your charitable company or CIO is insolvent or at risk of insolvency or
• What to do if your unincorporated association or trust is insolvent or at risk of insolvency