Going concern: what is it and how churches can look out for the warning signs

Thankfully, history tells us that the financial collapse of churches is rare and that for most trustees, most of the time, a going concern assessment is fairly straightforward. However, financial collapse is not unheard of and where it happens, the associated ripples that it causes can be significant.

Going concern for churches generally means that they can expect to continue operating as normal for the foreseeable future, being able to meet obligations as they fall due and not having to stop a major aspect of their work.

Two recent changes; the introduction of FRS102 Charity SORP for accruals accounts combined with the Charity Commission’s new Directions to independent examiners (expected to be implemented early in 2017), have raised the profile of going concern for all charities, even churches that have been operating for 50 years or more!

What does as assessment look like and what are the warning signs to look out for?

There is no definitive ‘one size fits all’ form of assessment and trustees should take into account the overall situation of the church considering for example the level of reserves held, and the breadth and financial security of its donor base.

The sort of warning signs which trustees and examiners should be on the look out for include:

• Running a persistent cash flow deficit;
• The imminent retirement or relocation of one or more significant donors;
• A change in pastor or minister, which could realistically result in major financial upheaval;
• Serious litigation leading to significant legal costs or potential penalties.

Just because one or more is evident does not automatically mean that the church has a going concern issue. However, trustees need to think carefully and take action where appropriate, making sure that any warning signs are not ignored.

Will a budget help?

In short, yes. For many churches, budgets are already a way of life, but others see them as unhelpful and even a hindrance. We see many advantages for churches that make use of budgets but specifically from a going concern perspective, a budget will provide a level of reassurance. This is especially true for external reviewers and regulators who can see that future expenditure requirements are likely to be covered either by income or from reserves.

Budgets do not have to be overly complicated but instead should reflect the complexity of the church. A small single location church is likely to have a more straightforward budget than a larger multi-faceted, multi-site church. Although most budgets cover an annual 12 month period (technically not long enough to meet the SORP’s requirements), do not despair; unless the current financial situation and the annual budget reveal a difficult or a deteriorating position, there is unlikely to be a requirement to project even further ahead.

Where does faith fit in?

We believe in a God of miracles and we recognise that every resource provided to the church comes from Him and that there are times when constructing a deficit budget may be appropriate, but this should not lead us to a ‘blind faith’; expecting God to provide financial resources when we have not planned properly. See Luke 14:28 -30 and the man with a half built tower.

What can we do if we are concerned?

We encourage trustees to address the situation as soon as possible considering:

• Whether an operating deficit is temporary or embedded.
• The size of reserves and the ability to absorb a deficit.
• The actions a church could take to increase its income (one-off or ongoing).
• The actions a church could take to cut costs (a plan B), remembering these will often take effect quicker than any income raising measures.

What should I put in place now?

We suggest the following actions:

• Formally assess going concern on an annual basis, recording conclusions reached and the supporting reasoning.
• Construct a forward looking budget extending for at least 12 months.
• Address any warning signs as soon as they become evident.
• Where necessary, work out a plan B in the event that things do not progress as you would like.

And remember, in most cases going concern will not be an issue, but please do read our briefing paper where the issue is debated in more detail.