Going concern for charities when funding is uncertain

Going concern is one of the most pressing governance challenges facing charities today, with rising costs, volatile donations and uncertain grant funding. What do trustees need to know?

By Caroline Webster

For many charities, going concern is an ongoing governance issue. Costs continue to rise, donations remain volatile and grant funding is increasingly uncertain, even as demand for services stays high.

In this environment, trustees and auditors can no longer afford vague reassurances about financial sustainability. The questions being asked are harder now and “we have always managed before” is not an answer.

How trustees can assess going concern under uncertainty

Don’t wait for your auditor to raise concerns, as the responsibility for assessing going concern sits with trustees.

This assessment should cover at least 12 months from the date the financial statements are approved and be based on documented evidence, realistic assumptions and a clear understanding of solvency and liquidity.

As the Board, you should be asking:

• What income are we confident about?
• Which funding streams could disappear?
• What do our reserves really look like once restricted funds are stripped out?
• What would we do if conditions got worse and have we modelled that?

Sensitivity analysis is also increasingly important so trustees understand both the base case and the point at which headroom disappears.

Know what auditors are looking for

Auditors are alert to signs that a charity’s financial position may be weaker than the board narrative suggests.

If any of these apply to your charity, expect hard questions:

• recurring deficits or shrinking reserves
• weakening unrestricted cash
• heavy reliance on a handful of uncertain income streams
• funding delays that could disrupt operations
• forecasts that depend on decisions not yet made or income not yet secured.

Where these pressures exist, auditors will expect clear evidence that trustees have properly challenged their assumptions.

Fixing your cash flow forecasting

A forecast may look credible at headline level but fail under closer scrutiny. Watch out for common weaknesses which include:

• overstating how certain grant income is
• assuming fundraising targets will be hit
• mixing restricted and unrestricted funds
• ignoring the timing of when cash actually arrives.

In a volatile environment, trustees need rolling forecasts that are regularly updated, linked to current management information, and able to show downside scenarios. If a forecast cannot show when cash becomes tight, which funds are genuinely available, and what realistic management responses exist, it is unlikely to provide enough assurance.

The bottom line

As a trustee, you cannot eliminate uncertainty, but you can govern through it with evidence and discipline.

A robust going concern assessment, realistic cash flow forecasting and timely disclosure remain essential in a difficult environment. In the current climate, prudent realism is a defining feature of good governance.

The next step

If you are unsure whether your going concern assessment would stand up to scrutiny, we are here to help. Please get in touch with Caroline Webster