Comprehensive Spending Review - what's next for charities?

Many charities reliant on the public purse for funding will be nervous following the cuts in government spending announced last week by George Osborne. The role that the charitable sector has to play as part of the Big Society will be both more difficult but also more important as a result of the cuts.

The temptation might be to carry on as before, brace for impact and wait and see. But that would be a mistake, leaving many charities disorganised and perilously placed for the future.

At such an uncertain time, there are important steps trustees and administrators should be taking to ensure that their charity survives what is, arguably, the most difficult period for funding in more than a generation, with revenue squeezed from both public and private sources.

Initially, the trustees should implement a programme of self-analysis by undertaking a thorough audit of costs and ambitions. This programme must ask basic accounting questions, such as what reserves are available to keep the charity afloat if state funding is withdrawn or substantially reduced?

Most state funding for charities, whether from central or local government, is reviewed annually. Fortunate organisations may have almost a year left before their funding is due for renewal, whilst others may have significantly less time. It will all depend on when the contracts were agreed and so it is crucial to be clear when your particular contract expires.

There also needs to be an assessment of the funding required to keep everything running, what funding may fall away and when that drop will take place. Following this assessment, the funding gap should quickly become apparent, allowing for the trustees to formulate a plan. Unfortunately, this is likely to mean that cuts in expenditure will need to be made unless there is an obvious alternative to replace the lost income.

It may be possible to cut costs internally, however painful, but it will probably also be necessary to look at how programmes run by the charity are funded and whether some will need to be reduced or even abandoned.

A thorough audit of income and activities coupled with the difficulties of cutting expenditure could lead many smaller charities to conclude, like Dickens' character Wilkins Micawber, that "annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery", and look for alternative solutions.

One option may be to merge with a complementary organisation, but this must be undertaken carefully. Two charitable organisations cannot just throw themselves together and expect the result to automatically satisfy the Charity Commission.

For charities heavily dependent on government funding it may be necessary to go into insolvency and wind up activities. Whilst this is the worst case scenario, it is one which must be addressed by the trustees when considering the future of the charity.

Some charities will feel the pull to do more, plugging the gap in services that may be left as government funding dries up. This is a laudable aim, of course, but it does entail risk. It is very important in the rush to help that the charity does not lose sight of its constitution. There is a danger of falling foul of the Charity Commission if activities stray beyond the charitable objectives that the Commission has approved in a charity's constitutional documents. Trustees need to be guided by their obligations to the charity when thinking of moving forwards, whether by merger or an extension of activities, so that charitable status is not put in jeopardy.

When considering the options open to them, trustees should consider the possibility that opportunities may come from unexpected sources. For example, many local authorities may try to transfer theatres, museums, galleries and other public activities out of their control so that they fall outside the scope of their budget. This may provide opportunities for charities to step in and take control.

However, one difficulty with a scenario such as this is that the new organisation running the local theatre or museum will still have to secure additional funding itself, which is no easier for them than for the local authority. In addition, there may be various tax benefits available for local authorities that are not available once a theatre is transferred to independent ownership. This potentially makes the eventual funding gap even wider, so any charity will need to carefully consider its options when making decisions.

Fortunately, many charities have financially sophisticated trustees who will be able to steer them through the difficulties they face.

These will be testing times, but doing nothing is not an option, it is an error. The sensible course is to plan for different outcomes as the funding axe is sharpened to fall over the coming weeks and months. The only way to do that is to have a thorough and realistic understanding of your charity. Plan for the Age of Austerity, because the one thing that charities can no longer rely on for a bail out is charity from government as part of the drive towards the Big Society.

David Scott is head of the charities group at the law firm Harbottle & Lewis LLP.

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