Practical solutions for charities in financial distress

Mergers within the charities sector continue to rise. According to data collected by the Charities Commission, mergers have increased over the last three years.

Why are charities merging?

A growing number have been rescue mergers, where one charity is at risk of collapse and merges with another to continue its mission. Charities are facing increasing costs due to inflation, rising wages, higher Employer National Insurance contributions, and increased utility and rent costs. Income from government contracts or grants has often stagnated or has not kept pace with costs. Donation income is also under pressure due to cost‑of‑living issues for donors. These pressures make independent operation harder, especially for smaller charities or local branches.
When a charity faces financial distress, merging with another charity is one option—but not always the best or only route.

Practical steps for trustees to restore viability without merging

1. Immediate Financial Triage

• Get a real-time financial snapshot

Update accounts to show the assets and liabilities of the charity.

• Assess priority payments

Identify essential outgoings such as payroll and critical services as opposed to liabilities that can be deferred. All discretionary spending should be suspended until a survival strategy is arrived at.

• Assess insolvency risk

Can the charity pay its debts when they fall due, and are its assets greater than its liabilities? If the answer is ‘no’, then trustees may need to seek professional insolvency advice. If the position is worse than anticipated, trustees should also consider whether a serious incident report should be submitted to the Charity Commission.

2. Internal Review & Governance Reset

• Review board skills and engagement

This will help identify gaps in financial, legal and fundraising expertise. You may need to recruit voluntary or paid advisors, as necessary.

• Schedule more frequent trustee meetings

During a period of crisis, clear agendas are required to focus on what is required to facilitate recovery. Also, tasks and responsibilities need to be clarified so everyone is focused on what they are doing. As cash is key to survival, a rolling cash flow forecast needs to be closely monitored at each meeting.

• Consider training needs

If necessary, arrange crash courses on subjects such as understanding charity finance, governance duties or even insolvency law.

3. Cost control and restructuring

• Identify core vs non-core activities

Consider what activities must continue to fulfil the charitable objectives, and perhaps pause lower-priority programmes. Obtain HR advice to establish whether there is scope for a temporary reduction in staff hours, redundancy consultations, or fixed contract non-renewals.

• Renegotiate contracts and reduce overheads

Approach landlords, suppliers and utilities and insurance companies to request payment holidays, deferrals or discounts. Also, speak to your bank to renegotiate overdraft facilities if appropriate. Look at every cost line and ask whether that expense is absolutely required.

• Premises rationalisation

Could the charity downsize, co-locate, or rent out unused space?

4. Income Generation & Fundraising Boost

• Conduct a funder review

Contact current and past funders and explain the charity’s situation. They may be willing to upgrade or extend their donations. Research new grant prospects and create a 12-month bid calendar.

• Apply for emergency/recovery grants

Many UK funders offer short-term “crisis” or “recovery” grants, for example, the National Lottery and local community foundations. There are websites such as the Charity Excellence Framework that will match your charity’s mission with appropriate grant-giving foundations.

• Launch a donor appeal

Use social media, newsletters and the charity’s website to produce a compelling appeal explaining the urgent need for support. This could be done by launching a crowdfunding campaign. Identify high-net-worth donors and use trustee networks to make introductions, and prepare personal briefings illustrating exactly what benefits could be achieved from their donation.

• Explore earned income

It may be worth setting up a charity-owned subsidiary to generate profit. This could be from venue hire, a shop, a consultancy, or the sale of services. For example, a mental health charity may offer free group sessions for beneficiaries but charge professionals for CPD-accredited training on mental health awareness. It may be possible for profits to be gift-aided to the charity tax efficiently.

5. Strategic Reset & Business Planning

• Redefine your mission

This may mean narrowing activities to better match resources, whilst still focusing on the impact that the charity can have.

• Rewrite the business plan

The business plan will be amended to account for the revised services and income generation. Costs can be amended to match income streams. Best and worst-case scenarios will be considered to test the resilience of the plan. Key performance indicators (KPIs) can then be tracked regularly to ensure that recovery remains on track and the plan can then be tweaked as necessary.

Summary

Throughout the process, trustees must focus on acting in the best interests of the charity and its beneficiaries. They must seek professional advice when unsure, especially around insolvency risk, staffing matters and legal liabilities. Accurate minutes must be kept, and the reasons behind all decisions documented. Trustees must also keep open communication channels with all interested parties, reporting on the progress being made with the recovery plan, and give a big thank you to all who have supported your charity during the difficult times, and let them know how beneficiaries have benefited as a result of that support.