Charities and cashflow - What should charities be doing?

In this guest blog, we share some top tips from Roman Kubiak, Head of Legacy Disputes at Hugh James, alongside insights shared by other leading industry experts, looking at the recent cashflow concerns afflicting the charity sector and how charities should be looking to protect their financial wellbeing.

Many UK Charities are witnessing a worrying decline in notification numbers and cash receipts resulting in their cashflow (or income) slowing.

The charity sector is unfortunately used to financial instability and in the past 15 years alone has weathered the 2008 financial crash, Brexit, COVID-19 and the war in Ukraine. However, this most recent hit on cashflow doesn’t appear to have a single catalyst. So, what other factors should charities be aware of, and take into consideration, in order to remain financially resilient?

Factors affecting legacy cashflow

The first thing to say, which is perhaps of little comfort, is that this seems to be an issue affecting numerous sectors. I’ve spoken with a number of organisations that have seen their income and cashflow nosedive over the summer after some otherwise very impressive financial performances in the 2022/23 fiscal year.

On the legacy front, we continue to see significant Probate Registry and HM Court Services delays, with data from the Ministry of Justice revealing that probate application delays are at their worst level since 2019. These delays have been exacerbated further by several other factors, including:

• The summer holidays - which have the potential to impact everything from the time it takes the Probate Registry to turn around applications or probate lawyers to balance accounts, to the delays in courts listing hearings and parties being able to agree a date to mediate a tricky will dispute.
• The housing market - in an environment where not only are house prices falling, but in many cases not selling at all, combined with high mortgage rates, increased cost-of-living, and an increase in Will and estate disputes, and you have a situation where the single biggest asset in an estate is locked-up – meaning the estate can’t be administered and beneficiaries, including charities, cannot be paid.
• Increased overheads and tighter budgeting - The costs of running a charity, as with any business, have increased significantly over the past few years. From utility costs to salaries and professional services fees. While the number of legacies has increased and growth remains steady, in real terms, rising inflation means that each £ from a legacy has less buying power.
• Recession - The natural response to which is that many people are tightening their purse-strings, and for some that means not paying debts already owing, generally in the professional services space. That, in turn, has a knock-on effect on those professional services which can lead to a lock-up in the economy more generally.
• Litigation - They say that litigation is “recession-proof”, and I can attest to that. During difficult financial times people in desperate need often look to alternative sources of finance, and for some that means looking to the prospect of a windfall or inheritance. In instances of unmeritorious claims, these serve to either whittle away estates in legal costs or otherwise leave estates locked-up for years.

So, what can be done?

1. Check your charity’s reserves fund and policy - While many charities will already have had to turn to their reserves during lockdown, others may not have done so. In either case, it may be that the fund is available to help. At the same time, it’s also worth a review of your policies on reserve usage to ensure that, in this new climate, they are fit for purpose.
2. Review your charity investments and policies - Do they need a review or a refocus from capital growth to income gains?
3. Be willing to tackle litigation head on - What proportion of your legacies are locked-up because of threatened proceedings? How many of those threatened claims are genuine claims or “try ons”? In either case, it may be time to take a more proactive approach - whether by seeing off the claim, considering compromise or mediation or, if all else fails, more formal steps.
4. Consider the how and when – Don’t forget to consider how your legacies are reported in your accounts and what impact that has on budgeting and forecasting.
5. Speak to your accountant - Ensure your accounts are in order and up to date at all times.
6. Make sure you’re recognised by HMRC online - particularly for new charities, this is an important step to enable you to claim tax reliefs and to use Gift Aid.

Overall, charities’ leadership teams need to make sure they’re abreast of any unexpected financial issues that could arise, as this should help spot any red flags and warning signs as early as possible and enable any appropriate measures to be put in place swiftly if there is a need to bring the performance of the charity back in-line with original expectations.

Having always been a relatively stable and reliable income stream for the long term, there is a tendency to dedicate legacy funds for ‘big ticket’ items (such as capital intensive projects, research programmes or engaging with multi-year contracts which require major investment). Charities now need to be both practical and agile when it comes to decisions about how legacy income is used in order adapt their plans and strategies, whilst ensuring they can still deliver their vital services that are so important for all.