Canada: Goodwill's Wake-Up Call: Funding Challenges In The NFP Sector

The recent news of Goodwill Industries of Toronto's (Goodwill Toronto) funding and cash flow challenges paints a cautionary tale for Not-For-Profit (NFP) organizations of all shapes and sizes. Participants in the broader NFP sector, which comprise a significant share of the Canadian economy and generate even greater social benefits, need to learn from what happened to Goodwill Toronto to ensure their long term financial stability so they can continue to help the individuals and groups they were created to service.

"Board members need to push their organizations to proactively demonstrate socioeconomic value to ensure government stakeholders have the information they need to make informed funding decisions. You as an NFP can do that. Don't rely on your government stakeholders to do it on your behalf," says Alex Kotsopoulos, Vice President, Economics at Collins Barrow Toronto.

A recap: According to newspaper reports, on a Friday evening, the Board of Goodwill Toronto resigned and without warning, all the Goodwill Toronto stores were closed. The closing was attributed to a number of factors including the retail environment and that Goodwill Toronto was facing a cash flow crisis. The branch CEO Keiko Nakamura was quoted as saying that there was "no viable option" for emerging from bankruptcy proceedings and saving hundreds of jobs (The Globe and Mail, March 3, 2016).

As one looks back at what happened to Goodwill Toronto, questions that come to mind include (i) when did the board first become aware of the cash flow difficulties (ii) what steps did the board take to identify and address the operational and financial challenges Goodwill Toronto was facing, and (iii) did Goodwill Toronto seek professional advice to assess whether a restructuring of Goodwill Toronto was feasible in order to ensure the long-term sustainability of the organization and, if so, when it did first seek that advice.

Could what happened to Goodwill Toronto happen to your NFP?

Alex Kotsopoulos says "NFP organizations face considerable funding challenges and like many companies require long- term revenue and cost stability for planning and operational purposes. Large fluctuations in their revenues and/or costs can impact their ability to meet their mandate and in some cases, the negative fluctuations can be a precursor of bad things to come.

In 2007, the NFP sector which includes universities, hospitals and non-profit institutions represented 7% of Canada's GDP or approximately $100 billion. The NFP sector's contribution to the Canadian economy in 2007 exceeded that of the motor vehicle manufacturing industry and the mining, oil and gas extraction industry. Simply, the NFP sector matters to Canadians and to Canada's economy!

What to do?

There are a variety of actions and steps NFP organizations can take today to limit their risk and improve the financial stability of their operations. It is vitally important that NFP organizations take proactive steps to get ahead of issues before they become substantial problems that require significant measures to address.

1. Know your funding model.

This seems obvious, however many NFP organizations have a limited understanding of their funding model and specifically how sensitive their revenues are to changes in economic conditions and/or changes in other factors that drive their revenues. Understanding the underlying reasons why revenues have changed historically and how they are likely to change in the future is absolutely essential to planning and developing strategies to mitigate risks.

2. Read the tea leaves.

In many cases, financial issues are presaged by warning signs. Financial controllers should have accurate and timely information and data to enable them to identify short term fluctuations and long term trends that could negatively affect an NFP organization's financial position. Processes must be put in place to ensure that any information of concern is brought to the attention of the board.

3. Diversify.

To limit risk, NFP organizations should diversify their funding sources. This is especially the case with organizations that rely disproportionately on contributed revenues, which tend to be the most sensitive to external factors. Similarly, NFPs that rely heavily on government funding may also be at risk.

4. Align cost and revenue risk.

This is probably easier said than done in many cases, but NFP organizations should seek to maintain a balance between the revenue and cost risks they face. In an ideal world, revenue risk and cost risk would offset each other in full or at least partially, thereby allowing an organization to decrease its expenses if its revenues go down. Practically, this could mean building some flexibility into an NFP's cost structure by attempting to limit the number of fixed costs it is responsible for.

5. Make your case.

Periodically, NFP organizations should take a step back and assess how they are performing and what impact they are having. It is important from a continuous improvement perspective and from the perspective of assessing an NFP organization's broader societal impact. Government stakeholders and policymakers in particular seek this information to make informed, quantifiable (where possible) decisions regarding allocating government funding. Engaging third parties to assess socioeconomic impacts can add credibility to the underlying analysis. In today's environment, there is an ever increasing spotlight on how an NFP spends and manages its funds. Maintaining a strong relationship with your funding providers can be essential to an organization's long-term viability.

6. Don't think that problems will solve themselves.

Not unlike businesses, NFP organizations regularly face financial issues. Some of those issues may be temporary and attributable to specific causes; others may be more systematic for which definitive action must be taken. No organization, and especially no volunteer board, wants to make the decisions that Goodwill Toronto eventually had to make. Proactive actions by a board, including the engagement of professional advisors (who may be willing to provide their services at a reduced rate to the NFP), may be the appropriate action to help the NFP counter the headwinds and allow it to continue to make its valuable contributions to society.

"Unfortunately, all too often, board members are reluctant to admit that there are significant financial issues facing their organization. Delaying taking action often decreases the chances of successfully addressing them. Too many times I think to myself, I wish that they had called me earlier when there was a window of opportunity to address these challenges," says Daniel Weisz, Partner, Restructuring and Recovery at Collins Barrow Toronto.

NFP sector funding models

As noted above, funding models in the NFP sector diverge considerably, but can be grouped into the following broad revenue categories:

Earned through provision of goods/services the NFP provides
Contributed, including donations, membership fees
Government, either one-time or ongoing funding in support of public services
Endowment, which provides investment income used to fund the NFP's operations

Why do these distinctions matter?

The drivers that impact each of these sources of revenue tend to be significantly different from each other. For instance, contributed revenues are highly sensitive to changes in the economy. Government funding can be a stable source of funding; however, all levels of government across Canada are, and will be, looking for areas to cut spending to get deficits in line and to focus government funds towards infrastructure investments and other priorities.

A significant and sudden decrease in revenues can dramatically affect an NFP organization's ability to serve its stakeholders and clients and meet its financial obligations. The funding model is an important factor in determining revenue stability and ultimately the risk faced by NFP organizations.

Why does this matter for Canadians?

The NFP sector is an important contributor to Canada's economy and generates a broader social impact that is not included in standard measures of economic activity.

This is an important point that is often overlooked by policymakers and the broader public. However, NFP organizations need to proactively manage their finances and ensure their long term sustainability. Board members have a vital role to play in this respect and Canadians are counting on them!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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