A deficit that appears quarter after quarter is a question about how the charity is funded and what it spends, and the board’s first job is to work out which kind of deficit it has. Some deficits are about timing, because money arrives after the spending. Others are one-offs, because a grant ended or a cost came in that will not recur. The third kind keeps reopening however the figures are explained, and that is the quarterly report telling the board the model has stopped working.
Running a deficit is common. The Charity Commission’s Charity Sector Risk Assessment 2026 found that around 2 in 5 charities spent more than their income in financial years ending in 2024. What matters for the board is how to respond while there is still time and money to choose.
Seeing the same gap every quarter? When the figures keep pointing at the model, the question is about strategy as much as finance, and that is the work we do with boards. See how we work on charity strategy.
A bad quarter, a bad year or a broken model
Spotting the pattern is covered in what trustees should ask about the money each quarter, and a slow deficit is a risk worth naming on the risk register. Once the board has seen it, the next step is to classify it, because each kind calls for a different response.
A timing deficit closes on its own. The charity spends steadily and its income lands in lumps, so a quarter before a grant instalment or a big appeal looks worse than the year will. Cash planning is the response, so the charity can pay its bills in the lean months, and nothing about the model needs to change.
With a one-off deficit, the board can name the cause and expect it not to repeat: a grant that ended without a replacement, a repair, a recruitment cost, a year of lower donations after an unusual one. The response is to decide how to cover it, once, and to check that it was a one-off.
Structural deficits are the ones that ask the most of a board. The charity’s costs sit above the income it can reliably raise, and the gap returns once the timing and the one-offs are taken out. Under the Charity Governance Code, boards are expected to assess if the charity’s approach and use of resources is sustainable, and if fundamental change is needed. A structural deficit is the point at which that question stops being theoretical.
How to tell them apart
Look at a full year of figures before drawing a conclusion from one quarter. A timing gap closes when the money arrives; a structural one is still there at the year end. Then take out every cost and every loss of income the board can name as a one-off. If the gap remains, the explanation lies somewhere in the model.
Ask which programmes depend on general funds, and by how much. A project funded at its direct cost alone leaves the charity paying for the management time, premises and systems it uses, and why winning grants can leave your charity worse off shows how that cost builds up. Several projects funded that way can produce a deficit even when every grant has been won.
Check which funds are carrying the gap. Restricted money can only be spent on the purpose it was given for, so if it is quietly paying for general running costs, the board has a problem with the restrictions as well as the deficit. Recording restricted income as it arrives keeps each fund’s balance clear enough to check.
Two more questions complete the picture. Has growth added cost faster than income, through new staff, new premises or a new service? And is the income the charity relies on still there in real terms, or is a grant renewing at the same figure while costs rise around it? Either can turn a charity that once balanced into one that does not, without any single bad decision.
What reserves can and cannot do here
Reserves exist for moments like this. A reserves policy sets out what the charity holds against a grant not being renewed or a gap in timing, so the trustees have time to act. They can cover a timing gap or a one-off without any change to the model.
Against a structural deficit, reserves buy time and nothing more. Each quarter they cover is a quarter in which the underlying gap is still open, and the reserves are smaller. If the board decides to draw on them, it should say for how long and what will have changed by the end of that period, and how to build a charity budget covers putting a planned draw into the budget.
Need a budget that shows where the gap comes from? The Annual Budgeting Framework shows the full cost of each programme, so trustees can see which ones rely on general funds and by how much, with a month-by-month cash flow and quarterly monitoring that flags the differences needing an explanation.
What the board can do about it
Reducing costs, increasing income and reviewing the charity’s funds and assets are the three groups of options in the Commission’s guidance on what to do if your charity is in financial difficulty, with continuing, merging or closing as the longer-term outcomes. That guidance stresses identifying difficulty early, and the Commission’s sector risk assessment advises trustees to act on early warning signs while they still have a range of options.
On costs, the useful decision is what to stop, made by choice and in line with the strategy. Deciding what your charity will stop doing covers ending work properly, with the people who use it, deliver it and fund it, looked after. Knowing where the money goes month by month makes that decision easier, and the Charity Expenditure Tracker flags any programme that has spent more than it holds.
Income is a question of mix as well as amount. A charity relying on too few sources is exposed every time one of them changes, and leaning on one income source explains why. Income that adds more cost than it covers makes the gap wider, which is why turning down funding that pulls you off course belongs in the same conversation. Where the fundraising itself needs rethinking, our fundraising strategy work is built for that.
Working with others is on the Commission’s list too. Its guidance mentions working with a similar charity, and the sector risk assessment names joint ventures, collaborative bids, mergers and combining back-office functions as ways to deliver a purpose more efficiently. Sharing costs this way can reduce what the charity spends without reducing the service, and a merger is a legitimate outcome when two charities serving the same people would do so better together. None of these is a sign of failure, and all of them take time to arrange, which is another reason to act early.
When the answer is a different model
Sometimes cutting costs and raising income cannot close the gap without changing what the charity does, who it serves, or how it is paid for. At that point, the board is looking at a strategy decision, and a finance fix will not hold. Refreshing or resetting your charity strategy covers how to tell which the charity needs and who decides.
The Governance Code’s phrase is “fundamental change”, and it puts the decision with the board. A reset prompted by a structural deficit happens under pressure, which makes it harder, but the alternative is a charity that keeps doing everything it does now on money that is running out.
What the board records and who it needs to tell
Record the diagnosis, the options the board considered, what it chose and why, and when it will look again. How trustees make decisions that hold up covers what the minutes need to show. Move to more frequent financial reporting until the position settles; the Commission’s guidance advises reviewing finances more regularly once difficulties are known.
Tell funders early. The Commission lists approaching existing funders among the ways to raise income, and a funder who hears about a problem with a plan attached is in a position to help. Tell staff and volunteers before decisions that affect them are made public, so the first they hear of it comes from the board.
When to take professional advice
Everything above applies while the charity can still meet its obligations. If there is any doubt about that, the position changes. The Commission’s guidance says that a charity facing insolvency, or already insolvent, should take professional advice as soon as possible, and that expert advice is worth taking before any significant financial commitment. Which rules apply at that point depends on the charity’s legal structure, and they are a matter for a solicitor experienced in charity law or an insolvency practitioner.
When the board can see the pattern but cannot agree what to change, an outside view can help it separate the timing, the one-offs and the model, and decide what to do about each. Book a free 30-minute call.
