Roman Kubiak, Head of Legacy Disputes at Hugh James, looks at the recent cashflow concerns afflicting the charity sector and brings together charity advisory experts from Milsted Langdon, RBC Brewin Dolphin and The Institute of Legacy Management for their insights and top tips for charities looking to protect their financial wellbeing.
Charities across the UK are witnessing a worrying decline in both notification numbers and cash receipts resulting in their cashflow (or income) slowing, with many charities reporting that their legacy income has been detrimentally affected.
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.
Charity sector experts from Hugh James, Milsted Langdon, RBC Brewin Dolphin and The Institute of Legacy Management consider the potential causes of the current cashflow crisis and provide recommendations for charities looking to manage cashflow fluctuations.
The Lawyer’s View
Roman Kubiak, Head of Legacy Disputes at Hugh James
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:
The summer holidays
It’s easy to forget the impact the summer holiday period has on cashflow and income.
However, this is perhaps the first year in some time that many of us have gone away without any travel restrictions. This can impact cashflow, 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. Put all these things together and you have a domino effect with an inevitable hit on cashflow.
Housing market
We’ve all seen the reports about falling house prices. However, that’s perhaps an over-simplistic view as it’s not simply that houses are selling for less, in many cases houses simply aren’t selling. Combine that with high mortgage rates, increased cost-of-living, an increase in will and estate disputes and many people going on holiday and you have a situation where the single biggest asset in an estate is locked-up. All the while the estate can’t be administered and beneficiaries, such as 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.
Depending both on when budgets have been agreed and when charities choose to report legacies in their accounts, this can have a big knock-on effect.
Recession
We’ve seen some of the highest inflationary increases in living memory, a true winter of discontent with many in the public sector on strike at some point, energy and fuel prices reaching record levels and a stagnant housing market. Whether we like it or not, this has all the hallmarks of a recession.
The natural response to that is that many people are tightening their purse-strings. 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.
This is a “bandwagon” that sadly many firms are keen to jump on, with promises of “no win, no fee” agreements which, in far too many instances (in my opinion), simply encourage and, dare
I say it, breed unmeritorious claims.
Such claims either whittle away estates in legal costs or otherwise leave estates locked-up for years.
The Accountant’s View
Gill Freeman, Partner and Head of Charity and Not for Profit at Milsted Langdon
Charities that are experiencing cashflow pressures more acutely than usual will likely be facing a funding crisis due to falling income as well as rising bills and a greater demand for services.
In the wake of COVID-19 and a cost-of-living crisis, this becomes a double-edged sword where funding streams could be less lucrative, commercial income may be dropping and costs for heating and fuel, in particular, have increased dramatically for some time.
Many charities, along with lots of businesses, have had to deal with staffing issues including retention and recruiting the staff they need. In addition, uncertainty in the market may affect the value of their investments and the dividend income that they receive from those investments.
There is always the likelihood of unexpected costs, which, even for the most organised charity, can catch them unawares.
The charity’s leadership team need to make sure they’re abreast of any unexpected issues that could arise, as this should help spot any red flags and warning signs as early as possible, and in order to do this, a charity needs to make sure their financial records are up to date. This will enable the appropriate measures to be put in place as soon as is practicable, to bring the performance of the charity back in-line with original expectations, or they might need to revisit their original budgets and forecasts.
However, if a charity suffers an unexpected shortfall, which could impact on what it sets out to deliver, it’s important to ask for help and seek professional advice early.
Charities and Not-for-Profit organisations have an obligation to regulators and statutory funders to disclose any issues or financial challenges and should do so proactively and transparently.
It has been a difficult climate for charities, particularly when it comes to fundraising in recent years, but on the positive side we are seeing many charities with an optimistic outlook for the future and changing the way they approach their fundraising.
There are also new opportunities including focusing on sustainability and reaping the benefits such as grants to make ‘green’ cost savings, and many charities can look at diversifying or targeting new funding streams or audiences.
One thing I’ve learnt working with charities and Not-for-Profits over many years, is that they are, in many cases, extremely resilient and are able to adapt as circumstances change so they can continue to deliver services to their beneficiaries.
The Investment Manager’s View
Paul Mathias, Assistant Director and Charity Investment Manager at RBC Brewin Dolphin
We too are seeing our charity clients facing the unenviable position of reduced cashflow at a time when the demand for their services is particularly high, and their costs have increased due to inflationary pressures.
Specifically, we’ve seen wage price inflation affect the service providing charities and our clients report staff recruitment and retention as being a big challenge. During the COVID-19 period, many operating charities found themselves cash-rich, primarily due to government support, and recognised the hard work of their front-line staff during by becoming ‘Real Living Wage’ employers. This came at a time when, with the benefit of hindsight, inflation was a lot more subdued than now.
Charities have also reflected on their overall purpose and position in society following COVID-19. This has, in many cases, resulted in charities investing in themselves, whether through an expansion in their service delivery and the development of new projects, or some notably expanding their fundraising and event operations, with the aim of multiplying their return on investment and looking to better secure their own financial sustainability.
Many of our larger fundraising charities are reporting lower legacies than expected, emphasising the importance of being prudent in budgeting for what can be quite ‘lumpy’ cashflows.
Following a ‘golden period’ where our charities were adding funds for investment, since mid-2022, all of the above factors have resulted in greater outflows from investment portfolios, whether through capital drawdowns, or a move from targeting long-term capital growth to increasing the level of regular cashflows through income payments.
Our role in this context is to work with Senior Leadership Teams to ensure the charity’s financial planning is robust. It is important to look at the reserves in totality, and how the investment portfolio fits in to this. If there is an unexpected call for cash, it is important this shortfall can be met with funds easily accessible.
‘Liquidity’ (the ability to convert to assets into cash) is crucial at such times. Proper planning should ensure that funds invested in higher risk assets such as equities are not likely to be needed in the short-to-medium term (less than 3 years) to avoid unnecessarily exposing them to investment risk.
For shorter time horizons, due to the pace of interest rate rises seen over the past 18-months, lower risk strategies such as cash and fixed interest may now have a more meaningful role to play in reserve allocations.
The Charity Sector’s View
Matthew Lagden, CEO of The Institute of Legacy Management
Roman, Gill and Paul collectively make some very good points and there is no getting away from the fact that charities are facing probably the most difficult financial time in recent history with regard to legacy income.
I would love to say there is brightness on the horizon, but this is a perfect storm whereby delays in overall systems and processes, combined with the fall in the housing market and rising costs elsewhere, mean it is time for some tough decisions.
Legacy income has always been seen as a stable and reliable income stream for the longer term and, by and large, historically immune from financial turmoil. What makes this different is that all the elements have come together at the same time.
The statistics show us that smaller legacies which would normally have arrived within 13 months now take at least double that. Payment times for larger legacies have increased from an average of three years to four years.
Because of its long-term nature and historic reliability, many of our members use legacy income for ‘big ticket’ items, capital intensive projects, research programmes or engaging with multi-year contracts which require major investment.
Many of our member charities now face a stark choice. Do they put those projects on hold; or do they plough on in the knowledge that if they don’t, then ‘project x’ will undoubtedly cost more in the future?
It’s a tough call and each charity will be different, but one thing I do know is that they need to be having some very serious discussions at the top table right now.
For the short to medium term, I think this will be the ‘new normal’ and that means conversations with finance teams about adapting plans and strategies, while ensuring they can still deliver the services that are so important.
With potentially 20% less cashflow coming in via legacies (certainly in the short term), those that cope best will be charities who are proactive, agile and adaptive.
And, as an organisation that plays such a pivotal role in helping charities to maximise the potential in legacy income, the ILM will be there to provide as much help, guidance and advice as we can.
Top Tips to Protect your Charity’s Cashflow
- Check your charity’s reserves fund and policy. 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 worth a review of your policies to ensure that, in this new climate, they are fit for purpose.
- Review your charity investments and policies. Do your investments need a review or refocus from capital growth to income gains?
- They say that recessionary times breed litigation and with the cost-of-living crisis and falling house prices, this has been no exception. 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.
- If there appear to be unreasonable delays with administration or a recalcitrant executor, is it time for a chaser or more active intervention?
- Consider how your legacies are reported in your accounts and what impact that has on budgeting and forecasting?
- Speak to your accountant – Ensure your accounts are in order and up to date at all times.
- Make sure you’re recognised by HMRC online, particularly for new charities, to claim tax reliefs and to use Gift Aid.
- Do you need a trading subsidiary, or conversely, do you need to consider its performance and if it is still viable?
