There are many indicators of forthcoming or impending insolvency, too many to list, but the following questions may be useful to ask:
- Are we aware of all potential liabilities?
- How much are these potential liabilities?
- Are these reflected in the figures we are looking at?
- Are there any grants that are repayable if we close or become formally insolvent? How does this affect the financial position?
- How much are redundancy and notice pay costs?
- Do we have adequate financial reports both in terms of quality and timeliness?
- Do we understand the financial reports?
- What is the current value of our investments?
- Do we spend our reserves because our incoming resources are not enough to meet our commitments?
- Are all our payments to our creditors up to date? If not, are any pressing for payment?
- Are we the sponsoring employer of a pension scheme? What is the position with the scheme, what is our potential exposure and can we manage to fund this for the foreseeable future?
- Are we using restricted funds to finance general day to day expenditure because there are either insufficient or no unrestricted funds available?
- Are we reliant on a handful of sources for our income? Are we certain those sources will continue to provide income to a level necessary to sustain our activities?
- Have we breached any covenants or conditions of our banking facilities with no means of restoring the situation?
- What are the potential costs of closure? What impact does this have on the solvency position?
Where there are questions or doubts over the ability of the charity to pay its debts in full and/or at least maintain the financial position as it is, the trustees should seek external advice. In the event of the charity appearing Insolvent, trustees should contact Kevin Lucas without delay to minimise or extinguish any potential claims against them personally.
Advice received from any external professionals should be carefully recorded, as should any decisions made as a result of that advice.
Identifying endowment and restricted funds. These are generally considered to be, in effect,
separate charities with their own trusts governing expenditure and can only be used for the
purposes for which they were given (but see section B3). Depending on the terms under which
they were given, some unspent restricted income funding may need to be returned to the funders.