Help your clients to remain viable.
As we approach the start of a new financial year the not-for-profit (NFP) community is preparing budgets and cash-flow forecasts to plan for the year ahead.
What we are seeing Budgets and forecast indicating problems and the potential for your clients to go broke.
The thing we don't see Decisions made to change the NFP's financial course to ensure its sustainability and survival to service the community.
The budgeting process is the time for your clients to deal with financial problems before they happen. From the Board down to the CEO and Executive team running the NFP, what ends up in the budget should be challenged and decisions made to improve the NFP and its expected financial performance.
"But we're a not for profit" is a common response to the figures being challenged when I assist NFPs in budgeting. My simple response is "To exist, profit or not, you must be financially viable." Not existing means no service delivery to the members or those who rely on the NFP.
Here are the key points for an effective budget process.
Deficits
NFPs must not have ongoing deficits. NFPs are inherently more challenged in raising funds to cover deficits and any failure to return to surplus will lead to the NFP going broke. Even if the NFP has significant reserves, regular deficits will put the organisation in peril.
Deficits should only be acceptable when due to a short-term cause and able to be fully funded sustainably. Additionally, there must be a plan on how to return to surplus in a short period. Examples of when a deficit would be acceptable are during the startup phase of a program, or a one-off event such as a natural disaster causing a short-term change in the NFP's circumstances.
Costing/pricing
The budget is the NFP's opportunity to understand the cost-of-service delivery and get its pricing right. If budgets indicate costing and pricing must change, then the decision must be actioned promptly. We see too many organisations both in the NFP and broader commercial sector that put off price increases and slowly send themselves broke as a result.
Why the NFP exists
The budget should reflect the organisation's purpose. Many NFPs become side tracked with non-essential activities. When the non-essential activities help fund the NFP's purpose, that's great. However, when non-essential activities generate deficits and reduce the NFP's ability to deliver essential activities, they should be stopped. For example, a charity run op-shop is opened to raise funds but makes a loss should be closed to prevent capital and essential funds being wasted.
Who's responsible
The short answer: everyone.
The Executive for each area is responsible for the budget preparation and delivery for that area. Part of their performance review should be based on meeting budget objectives.
The CEO is responsible for the organisation-wide budget and cash-flow forecast and must ensure each Executive's budget meets the NFP's objectives.
Ultimately, it's the Board's responsibility to set budget expectations and approve the final budget and cash-flow forecasts. The Board should not be afraid to reject budgets that don't meet expectations and requirements and should be willing to hold to account the CEO and Executive both in drafting the budget and running the NFP accordingly.
You may have noted finance is not responsible; that's because if finance just produce the budget there is generally no ownership and responsibility taken by others in the organisation. Of course, it's 'finance's responsibility to assist the Executive, CEO, and Board with the process.
Capital assets are not cash
Many NFPs have strong balance sheets predominantly made up of land and buildings. This often disguises a pending financial crisis. While the net asset position looks very strong, the working capital may be very weak-you can't pay wages with land and building. When banks assess a loan application it first checks to ensure it has security to fund the NFP but will focus on the NFP's ability to repay the loan. If the NFP can't demonstrate it can repay the loan without having to sell the security, it's highly unlikely the bank will lend in the first place.
Capital budget
The budget process must consider capital requirements as these normally impact heavily on cash flow. Also, it's the time to consider if capital investments can improve the NFP's efficiency and viability. A good example is upgrading software which may allow for reduced staff overheads.
The future looks bad
If the budget process is complete and it still looks bad, now is the time to consider the NFP's future. Looking at major restructures, merging, or winding up at the earliest possible time gives your client the best chance of ensuring its members and those who rely on its continued service. Hoping for the best won't ensure survival and puts your client in a situation where they can only go broke.
Successful organisations invest significant time and energy in the budget process. Their budgets go through multiple drafts dealing with these issues and looking for organisational efficiencies, ensuring their long-term viability and survival.
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.
