Financial resourcing: Five reasons why you can’t afford to get it wrong

By Ron Yates, former Senior Financial Consultant

Over the past few months, we’ve written about the financial skills you need at board, leadership and finance team levels. These financial skills aren’t simply nice to have, they are integral to running a successful NFP. While there is a cost associated with getting your financial resourcing right, this easily outweighs the cost of getting it wrong.

Sadly, we see a number of organisations that have been damaged by poor financial management. We’re not talking fraud – thankfully those cases are rare – but we do see the results of overstretched, under-skilled, or simply misdirected financial management and administration.  Here are the top five consequences of getting it wrong:

1. Increased costs

Failing to keep on top of financial admin can increase your costs. For example, late payment penalties, avoidable banking fees or the fines for late filing of regulatory reports and BAS returns can quickly add up. Would you rather spend your resources on fines or mission-directed activities?

2. Poor cashflow

This can be a knock-on effect of delayed raising or follow-up of invoices, or failure to submit funding acquittals. It can have a significant impact if you’re in receipt of large grants where payments are withheld pending acquittal reporting. Can you afford for $100,000 of a grant payment to be delayed whilst you’re still paying the staff who are delivering the program? What about the avoidable management time spent on worrying about, and working through poor cashflow?

3.Damaged relationships and reputation

The odd late payment or acquittal might be tolerated, but successive delays are likely to undermine confidence in the management and governance of your organisation, and could result in your stakeholders questioning whether they will choose to work with you or fund you again.

4. Lack of financial visibility

If there’s a pile of unpaid invoices sitting in a corner somewhere, or income that hasn’t been reconciled, you cannot really understand your financial situation. Should you be celebrating that things are going well, or wringing your hands over the hole in your balance sheet? If you’re operating with limited visibility, you’re making decisions in a vacuum, or based on inaccurate information. Neither is good for your organisation – or your mission.

5. Failure to deliver mission

Poor advice and weak financial information puts you at risk of either spending money you don’t have or, given the tendency of many not for profit boards to be risk averse and financially conservative, not investing in your mission. Imagine your finance manager telling you repeatedly that your organisation has no money. It will bring staff morale down, and keep it there. Your senior leadership and board will be wary of investing in the developmental improvements necessary to keep systems up to date and services relevant.

If you are genuinely broke and you have a good understanding of the financials, at least you will be in a position to plan your way out. But if the information and advice is wrong, and in fact your balance sheet is pretty healthy, you are losing the opportunity to leverage the resources available to increase your impact and further deliver your mission.

Not every not for profit can afford or even needs full finance team capability in-house, but be aware that saving money on resourcing your finance function can result in increased costs down the line if you don’t have access to the capacity and capability necessary to manage your organisation’s finances. Look for:

  • Opportunities to streamline processes, reducing staff time and increasing efficiency, through process improvements and better use of software. This will help to keep on top of processing tasks and free up your resource for value-add activities.
  • External support to:
    • Build the capability of your in-house team – eg through training and mentoring
    • Outsource elements of the work that you don’t need to manage in-house
    • Provide an external perspective that can act as a check and balance on your in-house team, and identify further opportunities to strengthen processes.

For more information on CBB’s consulting services, please contact us via email consulting@cbb.com.au or phone 1300 284 364.

 

 


5 must-have financial skills for NFPs

What does your finance team look like? Some of you might be asking ‘what team?’ As a core cost that is rarely funded under grant programs, financial management is often an ‘add-on’ to another admin role within small organisations, whilst larger, complex not for profits often have a full team with a range of skills to manage day-to-day financial transactions as well as planning for the longer term.

So, what your team looks like will depend very much on the size, nature and financial structure of your organisation. But no matter the size of your team, there are some financial skills that all not for profits should have access to – whether that be in-house or outsourced. Below we’ve put together our top five.

 

1. Day-to-day financial administration

Such as data entry and bookkeeping, processing purchase orders, invoicing, bank reconciliations, etc are the bread and butter of finance work and you should expect these from your team.

2. Financial planning and management

You need to be budgeting your income and expenditure and reporting actuals against your budget on a monthly basis. We sometimes find that smaller teams that are resourced for financial administration (rather than management) may be skilled to deliver the budgets and reports, based on reworking previous versions, but lack the strategic understanding to provide the analysis that is really needed for planning and decision making. This is an area where bringing in external expertise can really help the senior staff and board.

For larger organisations with resources, you’ll also need the skills to manage your investments – maximising the returns against your planned objectives. Again, there are opportunities for outsourcing here, but your business needs to set the policy regarding capital retention, income requirements and risk.

3. Understanding the NFP sector

There are some peculiarities to practice and regulation in the not for profit sector and it’s important that your finance team understand them. The ACNC is hitting its stride and using its regulatory powers to take action against organisations that don’t comply with reporting requirements, so it’s critical that your finance team understand what is expected of your organisation in relation to ACNC reporting.

Another area where we sometimes see organisations struggling is in relation to acquittals to funders. This can get complicated for organisations with multiple institutional funders, as resources may be funded from a variety of sources, all wanting slightly different reporting information.

However, failure to submit accurate and timely acquittals is likely to result in delays to future payments, or withdrawal of funding altogether, so your finance team need to get them right, and get them in on time. But this isn’t a responsibility that you should dump entirely on your finance team – reporting requirements usually include a narrative as well as the numbers, and your program staff also need to appreciate the importance of providing accurate and timely information.

4. Understanding industrial relations requirements and your employment policies

Even if you outsource payroll, your finance team may be the people giving the instructions on who should be paid what. So they need to understand the interplay between IR legislation, industry awards, your EBA and any internal policies and how these impact on both payments to individual staff and to the organisation’s overall financial picture, for example in terms of liability for annual leave and long service leave. This can be further complicated in our sector, where employees are often working irregular hours and practices around things like time off in lieu and access to salary packaging options are the subject of an organisation’s internal policy.

5. Segregation of duties

This can be a particular challenge for smaller organisations, where there is very limited resourcing for the finance function. NFPs are unlikely to get all the skills they need in one person, and it’s both a fraud and a business continuity risk if all financial processing is done by one individual. It’s bad for the business, and it’s not fair for the sole person in a finance role to carry that responsibility – and all the scrutiny that comes with it – alone.

Organisations that are sufficiently resourced to spread activities across a number of staff are more easily able to mitigate this risk. If you’re more restricted in your resourcing, as a bare minimum, you should be ensuring that no single person can process a transaction end to end through the business. Separate financial administration activities from sign-off authorities, using your senior staff as a checkpoint to reduce the risk of fraudulent payments and transfers of funds from your charity.

So what are your options?

If you haven’t quite covered off the top five skills we’ve outlined above, one option is to look at opportunities to outsource aspects of your work. In doing so you need to be conscious of cost (obviously) and the fact that it may be less cost-effective and efficient to outsource some of the lower level work than to have part-time admin staff in house.

Also remember that you are outsourcing activities and accessing expertise – you are not outsourcing your board’s responsibilities. So be conscious of delegation and authority issues and how you can best use outsourced services to complement the skill set of your internal resource.

For more information on CBB’s consulting services, please contact us via email consulting@cbb.com.au or phone 1300 284 364.


Does your finance manager have a seat at the leadership table?

By Ron Yates, former Senior Financial Consultant

What role does your finance manager (or person responsible for your finances) serve on your leadership team? Are they ‘just a bean-counter’, watching the budget, worrying about revenue and keeping expenses down, or do they play a more strategic role?

The role of your most senior finance employee is clearly to manage your funds. They need to be on top of the numbers and reporting these to the board and leadership team. They need to be ringing alarm bells when they spot financial risk, and they need to manage the work of any other resources with finance functions. They need to ensure that systems and processes are in place that protects your organisation from financial risks – particularly fraud and insolvency – and that your organisation meets financial compliance and reporting requirements.

But a finance manager’s role goes beyond balancing the books and ticking boxes. In this article, we look at the importance of ensuring your finance manager has a seat at the leadership table.

Risk-ready finance managers

Smart organisations will be looking for much more from their finance manager. For example, we often think of our finance people as risk averse. They are probably the member of your leadership team most likely to hold up the ‘stop’ (or at least the ‘slow down’) sign when your creative team member has their latest bright idea. While this may have been appropriate in the well-established organisations of the past, we’ve seen the evidence (including in big corporates) that in our fast-paced world, organisations that don’t innovate will wither and die.

Risk-ready finance managers are essential for all organisations, not just start-ups or those chasing growth. This doesn’t mean that we’re expecting our finance managers to be careless with the money – but they need to help the organisation understand the financial issues arising from opportunities presented. For example, an organisation looking at loan financing to invest in a new venture needs a finance manager who can take a robust look at the opportunities – what are the costs of the loan, are the revenue projections realistic, what level of risk is the organisation exposed to, and what are the potential benefits? A finance manager who can map this out with an open and enquiring mind will provide valuable information to support leadership and board decision making.

Finances for the future

Similarly, you need your finance manager to take a long-term view. How are you gearing for the changes on the horizon? For example, the NDIS, consumer-directed care, further digital revolution or some other external or internal driver. Your finance manager needs to fully participate in leadership discussions about future direction, and this needs to be reflected in your finance strategy. If you have to change your business model, your finance manager needs to be working through the downstream impacts, such as managing any assets or investments differently to lever funds for investment or cashflow. If change means that you have to restructure or reduce costs, the decisions about how that plays out across the business sits with the leadership team as a whole, but your finance manager plays a key role in scoping out the financial implications of different options – again, informing decision making.

Leaders need to know their numbers

This doesn’t mean that the rest of your leadership team should sit back and let the one with the calculator worry about the money. Each member of your leadership team needs to understand the organisation’s finances, how external market factors impact your organisation and how their team contributes to (or takes from) the bottom line. It’s also important that they understand the financial consequences of the decisions they make on the organisation as a whole, and the knock on effect this has on delivering social value. They need to role model good stewardship of your funds to their teams, just as much as the finance manager does. Most of all, they need to be prepared to make the difficult financial decisions collectively, as a team, rather than protecting their little kingdom at the expense of the rest of the organisation. A good finance manager, who can present information clearly and support evidence-based decision making, is a vital contributor to this kind of leadership performance.

For more information on CBB’s consulting services, please contact us via email consulting@cbb.com.au or phone 1300 284 364.


How financially savvy is your board?

By Ron Yates, former Senior Financial Consultant

I saw some promotional material recently that asked if your board knew the difference between cash and profit. The question gave me cause for concern. Not for profit (NFP) boards hold ultimate responsibility for the financial viability of their organisations so, while this is clearly a legitimate question, such a fundamental gap in financial understanding at a board level represents a significant risk for any NFP.

Many NFPs struggle to recruit board members that can bring an understanding of the cause, connection with the client group along with financial and management experience necessary to run the organisation. But the days are long gone when not for profits could get by with a treasurer who knows the numbers and little else by way of financial acumen. The context that we operate in, and the significant change to business models as a result of the NDIS and consumer directed aged care, mean that you need a board with financial nous.

So what skills do my board members need?

We’re not suggesting that everyone on your board should be a fully qualified and paid up member of the accounting profession. Board members don’t need to know how to prepare accounts, but they do need to know how to interpret them, and it goes beyond simply understanding the P&L. A proper understanding of organisational financials is critical to effective strategic decision making and risk management. Here are some of the things we would expect financially savvy board members to be able to do:

  • Spot issues and trends in the monthly reporting.
  • Understand the detail of the balance sheet, not just the bottom line. For example, fixed vs. current assets and their impact on current and future liabilities.
  • Understand a cashflow forecast.
  • Understand different types of funds, including the restrictions on grant or contract funding, and the implications on solvency.
  • The cost of running (and closing) the business.
  • The reserve levels required be the organisation.
  • Your strategy for investing reserves, and how this contributes to your longer term business strategy.
  • Make decisions based on financial evidence and projections.

Bringing board members on board

When bringing new people onto your board, don’t assume that their previous board experience will be sufficient for them to interpret and question your financials. Your way of representing different funding programs or cost centres is likely to be different to their previous organisation.

Without providing an adequate briefing to new board members on how the accounts are presented, there is a risk that they might make incorrect assumptions and misinterpret the numbers. Always take the time to run through financial reports with your new board members to explain what the information represents in the context of the organisation.

It’s a two-way street

Don’t forget that the board/management relationship is a two-way street – this applies as much to the financials as operational matters. Consider what your board needs to see to govern effectively, monitor the organisation’s position and make decisions.

Once you’re clear on what the content should be, make sure that the presentation is accessible and engaging, with the right mix of numerical data and graphical representation (including traffic light and dashboard type systems) so that board members can quickly and easily grasp the numbers.

Need help?

For more information on CBB’s consulting services, please contact us via email consulting@cbb.com.au or phone 1300 284 364.


Preparing for the worst: Ensuring you have enough reserves to satisfy your liabilities

By Ron Yates, former Senior Financial Consultant

Just recently, the team at CBB were asked the question of how much money an organisation should put aside as reserves in the event of having to wind up or cease operations. These reserves need to be enough to satisfy all liabilities should this worst-case scenario arise.

Two scenarios where this may occur are a) a complete organisational shutdown, or b) a departmental shutdown. Each one has varying implications. Generally though, the areas to be considered are as follows:

  1. Income. How much will the operation lose, potentially lose, or have to put aside if it ceases operation? Can the organisation afford to lose income or ring fence closure funds in the short term and still remain solvent leading up to the shutdown date? A difficult question, especially where there may be significant activities which still need to operate and may be reliant on funding being available, versus cash being set aside for an impending closure.
  2. Operating expenses. Can the operation reduce its expenditure to a level whereby it can maintain operations up to the relevant cut off date? Another issue arises where dependency on other areas may prove difficult, and cutting back in one area may cause issues in others, particularly where crossover occurs regarding cost sharing and responsibilities.
  3. Employee payout of accruals and provisions. This is a non-negotiable amount and one that can be calculated according to individual employee contracts. It is the absolute minimum amount that an organisation needs to have put aside in its reserves and may include such things as paid out sick leave (a non recorded liability), “X” number of weeks gratuitous payment for early contract finalisation (or even contract finalisation) and a similar scenario if there is additional payment due for employees over a certain age.
  4. Status of reserves. When utilising reserves from an organisation’s usual Nett Assets, consider the impact it may have on the viability of other areas and the organisation as a whole, along with the solvency impact it may have (can it still pay its bills with what it has left?). If cash was removed from the Nett Assets position to pay for the above expenses, what impact could it have on the continuing viability of the organisation?

All are very emotive, complex and difficult situations to quantify. If an organisation is to wind up, it must have – as a minimum – sufficient cash to pay out:

  • all of point three (above)
  • accommodation expenses up to the end of its contracted lease period, as well as any “make good” amount payable for leaving a leased premise
  • all operating leases up to their termination date
  • its statutory financial commitments (e.g. BAS/Return to Work, FBT, etc.) and audit fees to enable finalisation of finance matters

The cash needed to cover all of these costs can sometimes be overpowering and very unpalatable but real, and this is a scenario which numerous organisations are finding themselves in currently.

For more information on CBB’s consulting services, please contact us via email consulting@cbb.com.au or phone 1300 284 364.


Profitable not for profits?

By Jane Arnott, General Manager, Consulting and Business Services

We recently held an ExecNet in Adelaide with the title of ‘Selling Without Selling Out’. The shift to fee for service funding – particularly in the NDIS and aged care environment – means that not for profits are having to engage with end consumers as the purchasing customer and to compete with each other for that customers’ dollar. The shift to a sales culture is hard for many as it is perceived to represent a departure from the core values of the sector. For staff working in not for profits, the reality of this change is evident all around them, but not for profit directors may have further to travel to get into a more commercial headspace.

The recently published AICD Not for Profit Governance and Performance Study: Raising the Bar revealed that many directors are still uncomfortable with the concept of their not for profit making a profit. Continue reading…


Fraud: How to reduce the risk for your NFP

Unfortunately, fraud occurs in not for profit organisations far too often. Many studies have demonstrated that fraud is real and devastating to those affected. Fraud can occur in any NFP organisation with the perpetrator being undetected for quite some time. Often the fraud is only detected following either a financial abnormality being identified, OR the perpetrator being careless through their own complacency.

Fraud can take many guises with the perpetrator often being the most innocuous person associated with the organisation. Yes, these are generalisations – but the point is that anyone could be committing a fraud within your organisation.

What can fraud look like?

Well, it could be represented by any of these examples:

  • Poor cash collection processes and cash control points leading to an opportunity to take cash.
  • Expenditure approval and management of the payment process is undertaken by the same person.
  • The creation of false creditors that are linked, ultimately, to the perpetrator.
  • Transferring funds deceptively into private bank accounts.
  • Using the identity of other people to gain financial benefits for oneself.
  • Poor recording and reporting processes within the account and ledger management functions of the organisation.
  • A staff member often reporting that the accounting system is in need of repair because the ledgers are out of balance or there are journal adjustments needed to correct minor issues.
  • Withholding, manipulating and misreporting financial information to deceive or hide fraudulent activity.
  • A reluctance to complete reconciliations on a regular basis.

Minimising fraud is a function of good governance and effective risk management. Both should be directed by the organisation’s Constitution, which in turn informs the organisation’s board of their duty of care to ensure there are effective controls, risk management and risk mitigation processes in place to deter the fraudster from this behaviour. Whilst the perpetrator will eventually be dealt with by relevant authorities, the governing body can also be exposed to legal challenges as a result of poor practices and risk management. If the board has been found to not be diligent in ensuring that controls and risk practices are a focus of attention, then any aggrieved person may hold the board accountable and seek legal recourse.

How to minimise the risk of fraud

The risk exposure of the board can be alleviated by implementing the following four steps:

  1. Identify and assess areas of risk

A risk management system that includes identifying all types of risk in the organisation and then developing plans to mitigate the risk, is a very sound starting point. As fraud can be significant and can come in many forms, the board should ensure that it is aware of how fraud can occur in their organisation.

  1. Ensure that there are specific and relevant policies and procedures in place

Policies and procedures should be in place to prevent and/or detect the range of risks that could occur. In regards to fraud, there should be clear financial management controls and separation between who manages payment, who authorised payments, and who records the transactions in the organisation’s financial recording and reporting systems.

  1. Advise staff and other relevant stakeholders of the policies and procedures

An effective communication program should be put into place to ensure staff and suppliers understand the organisation’s fraud and risk management policies and procedures.

  1. Apply a continuous review

The board should encourage continuous review and regular monitoring of your organisation’s policies and processes.  Relevant external third party audits will ensure that there is veracity and strength in the controls put in place to identify and/or prevent fraud being perpetrated within your organisation.

Do you have any concerns about unusual activities within your organisation, or do you seek more effective risk management outcomes? Get in touch with our team via:

Email: consulting@cbb.com.au
Phone: 1300 284 364

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Social finance: Three things you need to be investment ready

By Jane Arnott, General Manager, Consulting and Business Services

At the recent Third Sector Expo, one of the speakers asked for a show of hands to demonstrate people’s level of understanding of social finance. Given that the delegates were all sector professionals, I’m not sure whether I should be surprised or not at their self-professed limited understanding of this space.

Social finance is the investment of funds to generate a social impact and a financial return. It’s the umbrella term for a range of approaches and models that have been developed in recent years as an alternative to traditional gift-based funding, where the intention is only to have a positive social impact. Paying back the original investment is the minimum, with varying levels of further return depending on the model and the investor. I think the gaps in knowledge in this space can be attributed to a number of factors: Continue reading…


Can your organisation pay its bills?

By Ron Yates, former Senior Financial Consultant

When reading reports, the key point for all organisations to be aware of is, are they trading legally or illegally, or in accounting terms, are they solvent or insolvent? Simply put, can your organisation pay its bills?

Recently I reviewed an organisation whose Board had not received a balance sheet for almost 9 months. The income statement appeared to demonstrate a positive position, one of improved performance and steady growth. What it did not show was what was happening in the “engine room”. Its cash had reduced to alarming levels and no one had bothered to advise the Board – it wasn’t their job, and to be fair, they did not know how to interpret reports, they simply produced them and distributed them.

For Boards to be fully aware of their financial responsibilities, they must be kept informed with accurate and timely reports. Income statements explain how an organisation is trading but the balance sheet demonstrates its health and this is an area too few truly understand and can interpret.

Lack of understanding or interpretation of these reports does not form a defence for a Board to deny responsibility for trading insolvently. Every organisation needs to understand these points and act as the adjunct to their Board.

Organisations must ensure that they:

a) provide income statements and balance sheets in a timely and consistent format, and
b) have a responsible person interpret them and supply comments and advice

By taking these simple steps, this will allow positive and decisive decisions to be made which may help to circumvent future liabilities for the organisation and its Board members.

For more information on CBB’s consulting services, please contact us via email consulting@cbb.com.au or phone 1300 284 364.


Turning liabilities into assets

An asset is something you own and a liability is something you owe, so how can a liability ever be turned into a asset or profit?

Perhaps we should start by reviewing the following equations:

  • More assets than liabilities = profit
  • More liabilities than assets = loss
  • More income than expenses = profit
  • More expenses than income = loss

All of the above equations are correct, however these terms can cause us problems every day. Assets versus liabilities, income versus expenses, debits and credits, profit, loss, surplus, deficits… So many terms to understand and work with and just when you think all is good, someone says that liabilities can be beneficial, or perhaps even a profit?

Most managers and Board members would be dumbfounded at the thought, thinking the person making the statement must be crazy. But it is true. A liability can be often be turned into a profit. Not in all cases of course, but some. How, you ask? It’s all about timing, being fastidious and understanding what your accounts are telling you…

For example, you could start by transferring the liability to the Income Statement or by reversing the liability out of the accounts, and the result would be an increase in profit. An example would be the long service provisions provided for employees. If a staff member leaves before being eligible to take their long service leave, then that which was a liability, then becomes an asset to the organisation in the form of profit after the liability was reversed out of the accounts.

Going back to reflect on expenses is also important. By checking figures from the previous month, you may find that you accounted for a bill or liability to cost more than it did. This difference in expense can then become a profit in your next report or statement.

If you need assistance with casting a fresh look over your accounts or learning to think outside of the accounting “box”, contact our  Consulting team on:

Email: consulting@cbb.com.au
Phone: 08 8444 9700

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