In this guest post, Ron Thomsen – Principal Advisor at One Direct Advisory P/L, provides an overview of what NFP’s should be considering with respect to financial, strategic and governance business planning for the year ahead.
One Direct Advisory provides for-profit and not-for-profit businesses access to an experienced team of advisors with extensive backgrounds in finance, legal and business strategy.
With most people returning to work in mid-January, there are some important but easy steps to check the organisation’s well being.
A. Common sense reminder to start the year:
- Review Risk Matrix to ensure that COVID related influences are addressed, such as staff shortages , vaccination policies and supply chain delays of essential supplies.
- Consider contingency plans, in conjunction with 1 above, for staff working from home flexibility and possible shortages
- Review the Strategic Plan, especially if it was formulated over 12 months ago , to see if the strategies, objectives and implementation timings remain relevant after the prolonged lockdowns.
- Review collegiate relationships to consider if the association objectives remain true and consistent with the original goals.
- Keep an eye on receivables and debtor ageing to ensure that there is no drift in payments, which often happens after holidays/lockdowns , and as other relationships have revenue collection problems.
B. Financial considerations and the timing of Revenue bounce back:
Most economists suggest that the Australian economy will have a good bounce back in 2022, but each business must consider the prospects for the sector of the economy in which they operate.
The Australian Institute of Company Directors annual survey of NFP Directors survey in November 2021 indicated, amongst other things, 40% of respondents said that it will take at least two years to recover from the pandemic.
For those NFPs who relied heavily on Government stimulus over the last two years, it is essential to consider how quickly the business revenue streams will bounce back to pre-COVID levels.
Financial modelling of revenue and expenditure, with “what if” sensitivities, is required to allow for the best planning for the business.
Monthly cash flow forecasting has always been the key indicator of how the business will meet its commitments.
Assumptions change, and indeed Government funding, and for the Department of Health and possibly other Government Agencies, the timing of payments from in advance to in arrears does impact cash flow considerations and needs careful financial considerations.
A critical review of funding needs and reserves capacity should be undertaken to ensure that the business is in a safe and comfortable financial position to fund existing programs and any future committed plans.
The Board should consider the purpose of their financial reserves and what amounts could be used in a worst-case scenario, or for support of unfunded programs and activities.
If it is established that there will be a prolonged period for the business to reestablish the business it is very important to review operating and capital expenditure budgets and any existing commitments, especially with respect to payment timings.
Any contracts, such as rental agreements, should be assessed for possible escalations in payments.
Overall, if there is any financial concern about the ongoing viability of the business all stakeholders should be informed, as appropriate, and the remedial action to be implemented, especially to the Funding Agency and the Auditor, documented. Communication is paramount and “no surprises” is the requirement.
C. Economic “Right-Sizing”:
It is probable that the economic viability of some programs or non-core business functions has become uneconomic whilst the business has been supported by Government Stimulus.
The Management and Board should consider each program’s purpose, client need and how quickly the program revenue will bounce back to cover expenditure. It may well be that it is decided to fund the program/s by Company reserves until revenue increases.
However, those programs which are nice to provide but have no economic future need to be seriously assessed how the costs of the program could impact the economic viability of the business as a whole, and in the provision of core services.
It is possible that Grant funding may become harder during the next few years as Government and Corporate sources of funds could be inundated by demand for the same or fewer resources, and Grant funds should not be relied upon as core income.
It is a good time to have a serious review of all activities, staffing and operations and to ask the question “is this function really necessary?” Or “does this fit with our purpose and vision?”
Also economic considerations such as the outsourcing of Administration functions like Payroll, Payments, HR may provide economic relief and could be a worthwhile consideration.
One Direct Advisory will be visiting Regional Centres in New South Wales to provide presentations on Financial Management and Outsourcing Administration to Aged and Community Care organisations from March 2022. For further information…
D. Collegiate Relationships:
Should the Board decide that using Reserves is inappropriate, and revenue recovery could be prolonged, then it could be appropriate to seek out organisations with common purpose and culture to work with to ensure the ongoing viability of the organisation.
The underlying criteria must be what is in the best interests of preserving the best service to existing clients, as the main stakeholder.
A collegiate relationship could be achieved by joining a group of like purpose organisations in a “hub” to gain economies of scale with staffing and administration expenditure.