Navigating financial stress in charities and independent schools

For many charities, the current financial landscape is becoming increasingly difficult to navigate. Rising employment costs, higher energy prices, increased regulatory compliance requirements and pressure on fundraising income are converging at the same time. Independent schools, care providers, cultural institutions and grant-funded organisations are feeling the strain most acutely, but the challenge extends across the sector.

These pressures are not temporary fluctuations. They represent structural cost increases for organisations that often operate on fine margins, rely heavily on donations or fee income, and have limited ability to adjust quickly. As a result, more charities are finding themselves with persistent cashflow deficits, growing creditor pressure and difficult decisions ahead.

Why charities face particular financial vulnerability

The operational pressures affecting commercial businesses apply equally to charities, but several characteristics make charities especially exposed:

• Restricted funding streams: Many charities rely on ring-fenced or project-specific income that cannot legally be redeployed to support general cashflow. Rising wage or energy costs can quickly create shortfalls in unrestricted funds.
• Fee-dependent models under pressure: Independent schools, nurseries, and care providers often cannot increase charges fast enough to offset cost inflation without creating affordability issues or risking loss of beneficiaries.
• Reliance on donations and grants: Fundraising income is volatile at the best of times. With household finances under strain, regular giving and legacy income are less predictable, creating further uncertainty.
• Fixed staffing obligations: Many charities — particularly those caring for vulnerable groups or delivering regulated services — cannot reduce headcount without compromising service obligations or regulatory compliance. This reduces flexibility significantly.

The result is a financial environment where liquidity issues can develop rapidly, giving trustees a narrower window to take responsible action.

Implications for trustees and their duties

Trustees are required to act in the charity’s best interests, protect its assets and ensure its continued ability to carry out its charitable purposes. As financial pressures escalate, duties shift subtly towards protecting creditors’ interests, similar to the position of company directors approaching insolvency.

In practice, trustees should be alert to:

• Signs that the charity may not be able to meet its debts as they fall due;
• Situations where continuing to operate without intervention could worsen the charity’s financial position;
• The need for timely, well-documented consideration of all restructuring or cost-saving options.

The Charity Commission expects trustees to monitor financial viability closely and to seek professional advice at an early stage if insolvency risk becomes a concern. Failure to do so can expose trustees to criticism or, in some cases, personal liability.

Specific challenges for independent schools and similar fee-funded charities

Independent schools illustrate the challenge sharply. Wage costs continue to rise, pension obligations remain significant, and energy and maintenance costs show no sign of returning to pre-inflation levels. At the same time, parental affordability is reaching a breaking point, resulting in increased bursary requests and reduced enrolment in some regions.

This combination can create a “slow burn” liquidity problem: schools remain fully operational and educationally successful, but with month-on-month cash deficits that cannot be resolved through small adjustments. Trustees may feel they have time — but the reality is that without early planning, restructuring options narrow quickly.

Common issues include:

• Fee arrears increasing and becoming harder to collect;
• Difficulty securing short-term borrowing for working capital;
• Pressure from suppliers or HMRC as debts accumulate;
• Resistance within the school community to necessary cost-saving measures.

In these situations, external support is often essential to ensure trustees make balanced, defensible decisions.

What trustees, advisers and professionals should be doing now

There are several practical steps that can materially improve a charity’s position and reduce risk:

• Refresh cashflow and reserves forecasts: Forecasts should reflect realistic income assumptions and updated operating costs. Trustees should not rely on optimistic enrolment, fundraising or grant assumptions.
• Stress-test downside cases: What happens if utility costs rise again? If fee income drops? If a major donor withdraws? Trustees should understand the implications early.
• Review restricted vs unrestricted funds: Trustees often underestimate how much is “locked”. Understanding this distinction is essential for solvency assessments and restructuring options.
• Engage early with lenders, auditors and key suppliers: Early dialogue enables more constructive solutions — including time-to-pay arrangements, refinancing options or negotiated variations
• Take specialist advice before options close: Whether it is exploring cost-saving programmes, collaboration or merger opportunities, governance adjustments, or a formal insolvency route, trustees are expected to show they have considered expert input.

Final thoughts

The financial pressures that charities and independent schools are increasingly facing are significant and unlikely to ease in the near term. For many boards, this is a moment to re-examine long-standing assumptions and to bring financial resilience to the forefront of strategic planning.

Trustees who act early, seek specialist guidance and confront challenges directly will be far better placed to protect their charity’s mission and beneficiaries. Those who wait until liquidity is exhausted may find that key decisions — and outcomes — are taken out of their hands.

How we can help

Our dedicated charities and not-for-profit sector team has significant experience in advising trustees of charities facing financial pressures or experiencing financial distress.  We offer a pragmatic and empathetic approach that takes account of the broad interests of charity stakeholders, and can support and assist trustees in ensuring the best outcome for the charity’s beneficiaries.