How to know when to close your charity down
Chris East, Founder at the Giving Business
Chris East, founder of the Giving Business and Appeal Director of City YMCA London’s current £19.4m development of a new homelessness hostel writes from an unusual position of failure. As Chairman of The Vine Project, last Autumn he found himself having to shut the charity down!
That evenings trustees’ meeting was the most gruelling I had ever been to. As a committee, tricky issues have always been handled professionally. A staff tribunal, tight cash flows and the occasional differences of opinion have been well managed. It’s not that that meeting was anything but well managed, it was the nature of decision that I had to steer us through as Chairman the decision, a final appraisal on any lifelines and the question ‘Should we close the charity down?’
Now I’m not sure about you, but closing a charity is not an everyday occurrence for me or my fellow trustees. We were on a fast-track learning experience. Whilst business leaders may have been here before, redistributing a company’s assets into another ‘vehicle’, this was a new experience for us.
The charity had always gone from one main funding round to another. Starting with a three-year lottery grant and chasing funding into a three year London Councils grant; both funding crevasses had been faced and conquered. The charity then successfully transitioned to a broader range of income streams, reducing their dependency on one major grant. In fact, we become a flagship entity with the local authority, who often rolled us out as the exempla in local social enterprise.
Despite a tight funding environment, we had managed to establish a strong middle management team that could take the day-to-day operational responsibility off the Chief Executive, freeing her to focus on establishing stronger networks and partnerships in the community.
Yet after 15 years, when entering this new financial year, we were well aware that cash-flow would be critical within six months. A local authority grant had been removed, with a year’s notice it has to be credited, and reduced trading and Social Fund income were all starting to bite. The hard facts were that without new grants or a new line of trading income we would run out of reserves. The writing was on the wall.
When I took over the reins as Chairman, some eighteen months beforehand, the spirit and drive of the organisation was flagging. A lack of success in funding applications and the need to continually prune the budget was dampening spirits, numbing our impact. Talking an old Christian motto “Without a vision the people perish” we set about establishing a new vision and mission for the charity. The vision was to achieve a step change in our growth by acquiring our own building in collaboration with other ‘reuse’ partners and growing our ability to deliver. The impact was immediately noticeable. Articulated and scripted, the new messages started to infuse a sense of purpose and renewed direction, quickly generating interest and potential partnerships. The Chief Executive was reinvigorated and the organisation found new courage. Alas the funding environment didn’t offer us the same optimism now.
So when is it right to take a decision to shut?
Like limited companies, charities are not allowed to trade insolvently. We never did. But we knew that our options for growth would not materialise before we would finally run out of money.
We identified six possible scenarios and actively pursued each to its logical conclusion:
- We challenged the local authority’s decision to cut our grant and we sought to renegotiate a service delivery contract, applying leverage through our MP and Councillors before meeting with the Executive.
- We sought to fast forward a developing partnership to establish a new base of operations and a new trading income for our work.
- We considered the options of approaching another charity to consider a merger.
- We considered options to slim down and ride out the environment allowing us to rebuild again in a couple of years’ time.
- We considered an option for a sustained wind down over six months.
- The last option, immediate closure.
We set clear deadlines for when a decision would need to be made and what progress was needed against each scenario, by when. Monthly trustees’ meetings were supplemented by conference calls allowing us to remain actively engaged in updates and responsive to making decisions. We continued to scrutinise our finances reviewing cash-flow forecasts on a weekly basis, micro- managing all expenditure and ensuring that we were fully appraised of the unfolding position.
So when is closure the right choice?
It’s all about cash-flow. For any small business, cash-flow is king. Ensure that you have an active handle on your finances. Ensure that your budgeting process – with costs centres linked to objectives – is thorough and translates through to your cash flow position.
It’s all about your reserves. Identify the costs of closing – your liabilities, redundancy obligations plus a liquidator’s fee – and never drop below that floor in your reserves position. Remember that restricted funds still need to be ring-fenced even if you are going through financial difficulties. Restricted funds may have to be returned to funders should you close.
It’s all about your ability to contract, regroup and then expand. We were a small organisation that had already made tough decisions about reductions in staffing levels and overhead costs. For us contracting again to a smaller team would never have retained the leadership expertise and capacity to be able to grow again. But for other charities contraction will still be a valid option.
There is no statutory definition of ‘insolvent’ although the Insolvency Act 1986, when referring to a state of insolvency, uses the phrase ‘unable to pay its debts’. In practice there are two separate tests for insolvency and failure of either might be an indication of insolvency:
- the charity cannot pay its debts as they fall due for payment
- the value of its liabilities exceeds the value of its assets.
For us, when all options were thoroughly exhausted or discounted, when the potential for renegotiations, partnerships, mergers, contraction and contract renegotiation were exhausted, the only option remaining was that of closure. When the options of a slow closure proved unaffordable no final choice remained other than a well managed and rational decision to close.
If you are faced with closure
As ever, ensure that all decisions and the reasoning behind those decisions are fully documented in writing.
As trustees your responsibility switches as soon as you decide to go into liquidation. At that point your primary responsibility is to act in the best interests of your creditors, ensuring that their interests are upheld.
Draw up a list of your creditors, which of course may end up including staff. Consider if any of them would offer a final lifeline for your work and communicate with them.
A solution may be in the best interests of all creditors. Any payments to creditors should only be scheduled in accordance with their priority, but deciding who takes priority was impossible for us, so we left the matter in the hands of the liquidator. Don’t seek to remove any assets of the charity, though non-cash assets can be sold if it results in maximising the funds for the creditors.
Take professional advice as soon as possible. And follow it. Your accountants will be able to provide a list of local liquidation specialists. Approach them and appoint a liquidator as soon as possible. Don’t take the charity through liquidation under your own management, contract in the professionals to handle matters. Entering into voluntary liquidation means that as trustees you choose the liquidator and the process until the liquidator hands over. It also demonstrates that you have actively managed the process.
As soon as liquidators are appointed they will take over the responsibility of managing the charity and the liquidation process. Your responsibility will then cease. They will liaise with Companies House and the Charity Commission. The Commission won’t get involved in liquidations, so we were advised to allow the liquidator to handle the process and inform them when it was concluded.
Did we fail? Did I fail?
Torturous as it was, I don’t see the decision of the trustees to make a well time and informed decision to close the charity as a failure.
The fundamental ethos of what is charity
The nature of being a charity is that someone has to be charitable. If no one is charitable, if no one has the vision to give and meet a need then the need goes unmet. Charities can only deliver because someone is willing to pay for that need to be met.
It’s what I spend a lot of time advising charities on: undertaking fundraising feasibility studies around capital aspirations and appraising if the case is attractive to prospective donors, if there is enough volume of support to make an appeal successful, and if a handful of people are prepared to step up to the plate and take the lead in giving. Without those three ingredients an appeal won’t achieve its target. It’s also why there are causes that are easier to raise money for and others that will always be challenging. Yes, leadership plays a huge part in creating an energy and appeal to a cause but there are particular causes that are easier to fund raise for than others.
The environment within which the charity is operating
Local authority funding cuts. The preference of foundations against repeat funding. The fact that small local community charities often chase funding streams rather then set vision and mission.
In this period of austerity with further significant funding cuts in local council budgets about to take hold, there just wasn’t the funding around to tap into. The failure of a London-wide re-use venture that won a programme of millions on the strength of the networks track record of delivery, yet failed to fund that network, added to the lack of funding streams for the reuse sector across London. And the environment wasn’t about to improve.
The fact that we ended it well
The Trustee’s actively managed the decision making process. The decision to close was taken over a sustained period of time. Every option for a lifeline was sought and the trustees were personally engaged in those approaches. Their ownership of the problem was high. The charity never traded insolvently and, despite sailing close to the wind in terms of reserves, they were able to choose to put the charity into voluntary liquidation rather than driven there by a creditor. Yes, of course there are casualties. Creditor obligations not fully met, staff made redundant, volunteer work placements halted and partnerships severed. But as a liquidation process goes, this was very respectful.
The opportunity for something new to be birthed
For everything there is a time and a season. Sometimes allowing something to die in turn allows something new to be born.
I’ve often been critical of charities that are afraid to die. I fear that many of our charities are in a process of self-preservation, the momentum of funding requiring that they continue to exist. They exist because they have always existed and the cause somehow becomes a secondary consideration. The greatest success for a charity may well be its ultimately closure. At least closure because the need has been met and the need for the charity to exist removed. Unfortunate such bravery is a rare beast in our proliferating sector.
So many wishes
I have many wishes remaining. A wish that we were still open. A wish that we could still be making a difference for the hundreds of people that we supported. A wish for the welfare of the staff team who lost their livelihoods. And a wish that something bigger and better will one day be born and bear immense fruit in our place.
The Trustees took the Vine Project into voluntary liquidation on the 20th November 2015. In its final year the charity provided over 5,000 low-income individuals and families with furniture, 400 local people participated in volunteering and work placement learning valuable skills in reuse and recycling and over 100 tonnes of waste was diverted from landfill being recycled and reused in the local community.
The Charity Commissions CC12 document Managing Financial Difficulties and Insolvency in charities is a useful tool to review if you’re considering closure.
The views shared are the personal experience and opinions of Chris East
Chris East, Founder of the Giving Business