All organizations must deal with financial uncertainty. The key, as always, is to maximize the level of services provided given your financial resources. The fundamental restructuring of delivery and funding of social services in Ontario has resulted in a state of chaos for many government funded not-for-profit organizations. The degree of uncertainty makes financial management more difficult and yet even more important.

In this issue we will lay out a financial management framework enabling you to use the skills you already have to adapt quickly to changing financial circumstances. For more detailed information on specific skills please refer to articles in prior issues.

Summary of the framework

Dealing effectively with change requires that your organization:

• Clearly understand its operating objectives and distinguish between core programs and discretionary programs.

• Develop both an annual budget of financial resources and a twelve month cash flow forecast that clearly maps out how the organization expects to finance its objectives.

• Set up a reporting system capable of providing your Board with relevant, understandable, and reliable information on a timely basis.

• Regularly compare actual with budgeted financial and operational results. Have volunteers and staff capable of dealing quickly.

and effectively when change is needed.

• Establish effective internal controls to safeguard your organization's resources and ensure resources on hand are used efficiently in delivery of service.

Set performance benchmarks

Your organization most likely already has a budgeting system, good internal reporting and a mechanism to follow-up progress throughout the year. How does uncertainty affect this process?

It is critical that you are able to determine when your organization needs to take rapid financial action in response to changes. Specifically, you need to set performance benchmarks to know just when to kick into high gear and react to the changes. For example:

• A childcare centre might set its benchmarks based on various enrolment patterns. If enrolment drops below a specific number of children in a room (for example, below 14 preschoolers in a room with a capacity for 16) then that might trigger a marketing campaign to increase enrolment and/or a review of the staffing model to see if costs can be reduced to match the drop in revenue.

• A drop in occupancy rates at a women's shelter might trigger a review to see if greater intake efficiencies could be realized.

• Cash and investments dropping below a certain predetermined amount might trigger a review of the budget for the upcoming six months to see if a serious cash problem could occur.

• Reduction of a single source of revenue might trigger a review of expenses to ensure that costs can be met for the foreseeable future.

Your Finance Committee/Board of Directors must clearly articulate a set of financial and service benchmarks that can be monitored fairly easily and on a regular basis. Failure to achieve these benchmarks should result in a review to see if corrective action is needed. This is when you can use the financial processes you already have to bring about needed change. 

Revisit organization objectives

Your organization should have an agreed upon set of objectives.

A clear set of objectives or priorities will help your organization focus on what needs to be changed in order to meet key financial benchmarks. Make sure that in setting these objectives you differentiate between core and discretionary services. As an example, consider an organization that runs a full-time childcare centre, a summer camp, a nursery school and a parent drop-in centre. If the full-time childcare centre is deemed to be the essential service then it will be allocated funds first if funding sources diminish.

Setting corporate objectives is best done through a formal process. All Board members, senior staff and possibly general members and the community at large should participate in the process. The outcomes should be well documented and communicated to all members.

Develop a plan to meet the objectives

Your organization already has an annual financial budget and may also prepare a monthly cash flow forecast for the upcoming year. If financial benchmarks are not met your organization must quickly revisit its budgets.

The revised budget should focus on ensuring that core services can continue to be provided. Surplus financial resources, when available, can be allocated to non-essential programs. When preparing the budget concentrate on ensuring that:

• core programs have sufficient financial resources to function throughout the year.

• financial resources are allocated to non-essential programs only after core program resources are secured.

The revised annual budget should be approved by the Board of Directors. Use the approved annual budget to help you prepare an updated monthly cash forecast for the upcoming year. Compare the monthly forecast with actual results throughout the year. Review again the revised monthly cash forecast if the organization continues to fall short of set financial benchmarks.

Budgets should be dynamic and should be seen by the Board of Directors as one of the most critical elements of financial management used by the organization.

For specific guidance on budgeting see the October Financial Advisor, Vol. I, Issue 9, p.37-42. For comments on what constitutes an appropriate level of surplus/net worth see the May Financial Advisor, Vol. I, Issue 5, p.21-22.

Monitor the results of your plan

Clearly stating your organization's objectives and establishing and approving a revised budget will help you know where you are going and help you react to change. Your organization also needs clear information as to where it stands financially so it can determine whether it is on track or further adjustments need to be made. Monthly financial reports should continue to be prepared for your Board of Directors for this purpose. The information reported must be:

• relevant to running the organization.

• sufficiently summarized to be readily understood by Board members. Information must also be comprehensive enough to provide Board members with sufficient information to make decisions.

• accurate and correctly reported. The underlying books and records must be accurate and sufficiently well organized to permit reliable financial reporting.

• reported within reasonable time frames (e.g. within three weeks of month end).

Financial reporting to the Board should be done at least monthly if your organization is in a state of financial flux. You can get by with less frequent financial reports only if your organization is blessed with financial stability and if that stability is unlikely to change in the near future.

For a detailed review of aspects of monthly financial reporting to your Board of Directors see the January, 1997 Financial Advisor, Vol. II, Issue 1, p.4-6. 

Evaluate results and revise your plan

Each month compare actual results with those estimated. Doing the comparison is easy. Acting on the information is more difficult. Your Board must have the will to adapt quickly to changes in revenue and expense patterns. Specifically, if revenue is less than expected then your organization must determine whether:

• to operate at a deficit (assuming the financial cushion is sufficient to permit this).

• additional sources of funding should be sought, and/or

• service levels must be reduced.

To deal with change quickly and efficiently your Board needs the best resources available. Specifically, you need to recruit capable and understanding Board members with the ability to make difficult decisions and implement change. We recommend that your organization set up a Finance Committee and appoint to that Committee capable Board members and outsiders if necessary. For comments on staffing a Finance Committee, the possible mandate and calendar of events see the November, 1996 Financial Advisor, Vol. I, Issue 9, p.45-47.

Change staffing models with caution

In most not-for-profit service organizations staff salaries and benefits account for between 75 and 85 percent of expenses. In times of funding reductions controlling staffing costs is the most effective way to meet financial objectives.

Reducing salary and benefit costs is a complex process that must be properly handled. We strongly recommend that you either recruit a labour lawyer to your Board or, if that is not possible, consult a labour lawyer before making any significant changes to existing staffing models. Failure to do so before laying off staff or reducing their hours or salaries can result in significant unexpected monetary settlements with staff, bad staff morale and use of significant and unproductive amounts of volunteer and paid staff time.

 Controlling your organization's financial assets

It is important that your Board/Finance Committee devise a set of financial controls to ensure that the organization's financial resources are used only as intended.

Internal financial controls should be applied in the context of the culture of your organization. The Board of Directors sets the tone of internal control at an organization. Consequently, if your organization wants to maintain a set of internal controls for effective financial management then the Board must be prepared to follow up on a regular basis to ensure that the policies and procedures are being followed. Strong support at the Board level for appropriate controls generally results in effective financial management.

For a detailed summary of internal financial controls see the September, 1996 Financial Advisor, Vol. I, Issue 8, p.33-36.