What causes Insolvency

There are many factors that cause insolvency in business, never mind in a charity or not for profit organisation. These factors are often gradual and do not happen overnight.

The list that follows will by no means be exhaustive, but here are a few specific to charities that and not for profit organisations

  • A charity’s financial problems often arise from the losses of a trading subsidiary. Trustees should be alert to their duty to use the assets of the charity solely for its charitable purposes and not to support losses in its subsidiary.
  • Overreliance on a handful of grant providers
  • Overreliance on legacy gifts
  • Insufficient spread of skills in the management team or board of trustees
  • Unwillingness to view the organisation as a business and plan, review and react accordingly
  • Inability or unwillingness to make swift decisions
  • Too many competing charities and an unwillingness to merge
  • Lack of investment or reinvestment in the essential aspects of the charity – e.g. a building or fundraising team
  • Lack of financial education in the management team and no external support to explain what the numbers mean
  • No consideration for the ‘costs of closure’ – e.g. redundancy and notice pay costs, professional costs, destruction costs, obligation to repay certain grants
  • No understanding of the true market value of the organisation’s assets. Often these are overvalued in the mind of the trustees as they are viewed as being of significant value in achieving the charitable objectives

Ultimately a lot of factors that lead to insolvency arise due to the nature of the trustees/management committee. It is common for them to be fiercely independent, proud of the organisation’s history and the reasons for which it exists, but very few entities get by in today’s world without collaboration, sharing and flexibility. Once this is understood and acted upon the future will look brighter.

If you feel you are experiencing a decline in your organisation’s financial position, whether or not you already know it is insolvent, then call Lucas Ross today on 0330 128 9489 and speak to Kevin Lucas.