Charities in the UK face mounting financial pressures: funding gaps, rising costs, volatile donation flows, and growing demand for services. According to a recent Charity Commission analysis, two in five charities (42.6%) are running budget deficits, and the aggregate sector wide surplus narrowed from nearly £3 bn in 2022 to about £0.7 bn in 2023. In this climate, effective treasury management is essential to safeguard your mission and support long-term goals.
The Liquidity Challenge
Beyond these headline issues, charities face challenges in liquidity management as funding often arrives in bursts after major appeals, grant instalments, or seasonal donations, while costs remain steady year-round. This mismatch can quickly lead to strains if not conscientiously managed.
Luckily, periods of surplus liquidity, for example, just after a successful fundraising campaign or grant payment, create opportunity. Rather than leaving large sums in low-yield bank accounts, where inflation erodes value, charities can safely put surplus funds to work in secure short-term investments that preserve capital and maintain access to cash.
Forecasting and Stress Testing
Informed cash flow forecasting is, therefore, a critical first step in effective treasury management. Mapping out expected cash inflows and outflows over various time horizons is essential, not only to ensure operational continuity but also to inform broader decisions pertaining to debt, investment, liquidity, and project planning.
Charities may additionally benefit from pairing these forecasts with liquidity “what-if” analyses or stress tests. For example, a charity might simulate adverse scenarios such as a significant drop in donation income, a major grant payment being delayed, or an unexpected spike in demand for services. Such testing can help inform the size and structuring of liquidity facilities. Arlingclose draws on extensive experience with the public and third sectors in developing forecasts and liquidity assessments.
Making Surplus Cash Work
Combined with the above forecasting to provide a clear view of cash requirements and inflows, charities should implement short-term investment strategies that provide prudent returns on surplus balances without compromising liquidity. Informed by the charity’s unique time horizon, risk appetite, liquidity needs, and any ethical considerations, funds may be invested across a mix of investments.
Typical low-risk options for short-term investments include Money Market Funds, which pool high-quality short-term instruments to provide liquidity, diversification, and typically better yields than standard accounts. Term deposits and notice accounts can also offer higher rates, though access is limited during the fixed term or notice period. Charities that have good visibility over their cash can ladder their investments into liquidity buckets and consider ‘standard’ funds, and, if willing to accept slightly more risk for longer durations, ‘cash plus’ funds, which include short-dated bonds and likely deliver higher returns. A different set of investment objectives may be appropriate for endowment funds.
When investing surplus cash, diversification and due diligence are paramount. Concentrating too much cash in a single bank or instrument exposes a charity to counterparty risk. Therefore, charities should consider spreading deposits across multiple institutions, depending on each organisation’s placement in the credit institution’s liability stack. Arlingclose advises charities on structuring investment portfolios that align with their liquidity needs and risk profile. This includes providing approved counterparty lists for clients based on thorough credit assessments and due diligence. By developing a measured approach to investments and liquidity management, even smaller finance teams can ensure they earn a competitive return on cash without sacrificing safety or accessibility.
Contingency Planning: Liquidity Buffers
Even with careful forecasting and cash investments, uncertainty means that charities should plan for contingencies. Many larger charities elect to establish liquidity buffers in the form of standby credit facilities to cover unexpected shortfalls.
A Revolving Credit Facility (RCF), for instance, is a flexible loan agreement that allows an organisation to draw down funds up to a pre-set limit, repay, and redraw as needed during the term. The charity pays a commitment fee on any undrawn portion and interest only on the amount borrowed – making RCFs a convenient insurance policy for smoothing cash flows.
Such facilities can be used to bridge timing gaps, to act as a backstop for emergency expenditures, or to temporarily fund project outlays that will later be covered by fundraising. Arlingclose has advised clients on the sizing, structuring, and negotiation of RCFs and other credit facilities with banks to ensure terms are aligned with the charity’s needs.
Reviewing Debt Portfolios
In addition to liquidity facilities, charities should periodically review any existing debt or borrowing arrangements in light of changing market conditions. This is especially relevant now, given the interest rate volatility seen over the past years. Many charities that have loans could benefit from evaluating refinancing opportunities. For example, some organisations might have legacy fixed rates that could be renegotiated or restructured to reduce costs or modify maturities. Regular debt portfolio reviews help ensure the charity isn’t overpaying on interest, that loan maturities are staggered to diminish refinancing risk, and that all loan covenants are being met comfortably. Arlingclose brings extensive experience in negotiating debt refinancings and restructurings with creditors, helping clients to navigate lender discussions and capitalize on market opportunities for cost savings and risk reduction.
Enabling Mission Through Financial Stewardship
In an increasingly challenging financial landscape, strong treasury management has become a linchpin for charities striving to achieve their missions. Effective stewardship of cash and investments ensures that every pound works as hard as possible for beneficiaries, while prudent risk management protects the organisation from financial shocks. We have seen how poor financial management can bring down even high-profile charities (such as Kids Company), whereas those with robust treasury practices can navigate uncertainty with confidence. This extends from day-to-day tasks, like forecasting cash flows and optimizing bank deposits, to more specialized functions such as restructuring debt and hedging risks. Because many charities do not have the resources for a dedicated in-house treasury function, partnering with expert advisors can bridge the gap, bringing sophisticated tools and insights within reach of the third sector.
Arlingclose’s deep experience in treasury management across the public and non-profit sectors positions us well to support charities in strengthening their financial resilience. By taking a holistic but tailored approach – combining liquidity planning, investment strategy, financing solutions, and risk control – we help charities ensure their finances serve their charitable objectives. With the right treasury strategies in place, charities can focus on delivering public benefit today, while confidently planning for tomorrow.
If you would like more information, please visit our website for more on Charity Treasury Services, or contact us at nkeeling@arlingclose.com or 08448 808 200.
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