7 financial tips for NFPs.

Hi everyone! I’m Lisa Gissing from Westpac’s Davidson Institute here to talk to you today about some useful financial tips for not-for-profit organisations. In our experience at Westpac’s Davidson Institute there are people becoming involved in the financial management of not-for-profit organisations who have little or no financial management training

… not through any fault of their own, but simply because they have a desire to be involved in an organisation that reflects their values and whose outputs, or impacts on the community, are close to their heart. However, as the numbers and variety of organisations increase, the available resources are stretched further, and there is a greater call for accountability so it is becoming more imperative that organisations, and the people who work in them, become more financially aware and astute.

To that end, we have put together our top 7 financial tips to get you started. So, without further ado … our top 7 tips are: - Have a plan, not just a mission − Understand and monitor the financial position of the organisation − Understand the costs to deliver the organisation’s service − Manage cash flow

− Manage growth − Efficient use of resources, and − Plan for transition But let’s delve into each of these more closely. As we do so we are going to have a look at the experiences of an organisation as they implement these tips. Let me introduce you to Mary’s Soup Kitchen.

Mary’s Soup Kitchen is a small organisation that was established in 2005 with the sole purpose of providing the local less fortunate families with the basic necessity of food and drink. Mary herself had experienced the hardships and challenges of being homeless for a period of time following a major natural disaster. With a passion for cooking for family and friends, Mary saw The Soup Kitchen as a way of giving back to her community.

It began operations one night a week using the local community hall. As more and more people started to make use of the service Mary saw the need to make the service available more often. By the end of the first year the organisation had grown to the extent that they were serving 100 meals every night. So, you can see that this is a rapidly growing organisation that is servicing a growing need in a local community. You'll learn more about Mary’s Soup Kitchen as we follow their journey

implementing our 7 tips. 2.43 Tip #1 is to have a plan, not just a mission. Every organisation is established with the vision of somehow improving life. There is a vision of creating a social impact that enhances life for someone in some way. It’s this vision that attracts resources to the organisation however without a plan that vision and the organisation’s mission may not be achieved.

Achievement of an organisation’s social purpose is greatly enhanced when the time is taken to put together a plan. By developing a business plan the organisation gains 3 benefits: It clarifies the objectives or purpose; It clarifies the way forward; and it clarifies the key measures of success.

Getting the first of these right is absolutely critical as the others follow from there. It is one place though where I see many organisations struggle. There are so many opportunities to make a difference in their community that they tend to try to be everything to everyone and in doing so often don’t achieve what they originally set out to.

I spoke to Mary about the Soup Kitchen and she said that in the beginning she didn’t have a real plan –she saw the time spent on planning as time not spent in the community helping the people she wanted to help. In hindsight she says if she’d taken the time to think through exactly what she wanted to achieve, and how, the Soup Kitchen would have avoided a number of the mistakes made in the beginning and would have been a more efficient operation.

It was only when she was in the midst of growing rapidly and these mistakes were starting to affect the operation of the organisation that she sat down and invested time in developing a plan of HOW this was all going to happen. She admits it would have been much easier if she had had a plan in the beginning, but now with the plan in place she is reaping the benefits of the very clear direction and success measures.

In turn this is also helping her report back to stakeholders and to attract new and ongoing financial support from the community as she can now clearly articulate their purpose and the results they are achieving. Like Mary, without clarity about exactly what your objective is; how you are going to get there; and what it looks like when you do … then there’s real potential that your organisation may not be having the community impact that it could with a good solid plan as its foundation.

Tip number 2 is to understand and monitor the financial position. As we noted at the outset many people become involved with NFP organisations because of their desire to improve life for others. This passion however isn’t always accompanied by the knowledge and skills to undertake the roles they end up in. This can be anything from sitting on a board, to managing a fundraising event, or even simply managing the 'nippers' training.

However increasing accountability both from a legislative and community expectations perspective means that it is more and more critical to understand and monitor the financial position of these organisations. The first step here is to understand how the financial operations of an organisation works. To demonstrate this we are going to use a model called the Financial Operating Cycle. This model illustrates how money flows through an organisation.

When the organisation was originally established funds would have been made available in one form or another and this is the original Equity of the organisation – that is, the organisation’s own money. If this wasn't enough to get started the organisation may have had to obtain some stock on credit or borrow from a financial institution to top up the equity. This of course is known as Liabilities.

With our money that is the equity and other people’s money, the liabilities the organisation used these funds to purchase the assets they need to operate. This could be assets like stock, vehicles, equipment and so on. These assets are then used to provide the organisation’s services and to generate more income. As soon as the organisation begins operating, it’s going to incur some expenses like rent, wages, electricity and so on ... and at the end of the period if we have managed this process

well it will have a surplus. Now I know this isn’t the aim of many organisations, but you’ll soon see why it should be. This surplus is retained in the organisation and used in two ways … 1Reinvest in assets – it could be saved as cash, used to purchase more stock or another piece of equipment and so on … to help continue to provide our service to more people OR 2.Reduce debt and reduce the costs and the risks to the organisation.

The key to long term sustainability is to keep this cycle turning over smoothly and efficiently. We want to efficiently be using our assets or resources in providing our service and generating more income for ourselves. We want to efficiently be managing our expenses to provide as much of our service as we can with the funds available. Then efficiently be using any surplus to reinvest in the organisation to either reduce the risk and costs by reducing debt, or to increase our outputs or grow by

by reinvesting in assets. This model also demonstrates the relationship between our financial statements. ‘Assets equals Liabilities plus Equity’ is our Balance Sheet. It provides a snapshot, at a single point in time, of the organisations assets and how they were funded. ‘Income less Expenses equals Surplus’ is our income statement and shows how the organisation has performed financially over a period of time.

But what we can clearly see now is that there is a relationship between the two financial statements and to have a complete picture of the organisation’s financial position we need to be able to read and understand both. The next step is to measure how efficiently this cycle is turning using a set of financial ratios. There are literally 100’s of these to choose from so we don’t have time to get into them today …

But, by way of example, Mary measures things like how efficiently her assets are operating in providing her service and generating income for the Soup Kitchen. She also has quite high labour and food expenses, so she keeps a close eye on how much of each dollar of income is spent on these two expenses in particular. It’s about identifying what the key drivers are and measuring them regularly.

Before we move on from this model, I just want to make one final point. The model shows that any surpluses are reinvested in the organisation and used in 2 ways. What if the organisation makes a deficit instead of a surplus? … this would indicate that the organisation would either need to borrow more which is often not an option or reduce the assets. A reduction in assets often means a reduction in the organisation’s ability or capacity to be able to deliver on its purpose in the community.

Not a position any organisation wants to be in. So, you can see it’s important to keep on top of the organisation’s financial position to ensure it remains sustainable and beneficial to the community. Tip number 3 is to understand the costs of delivering your service to the community.

These costs of course are many and varied. Understanding these costs and what drives them is critical in understanding how much funding needs to be sourced to deliver a certain amount of your service – which also leads to being able to produce a more accurate budget. To get a better understanding of these costs we are going to ask the question “did delivery cause this cost?” or is it a cost we would have incurred regardless.

Using Mary’s Soup Kitchen as an example, for every meal served there are food costs, preparation costs, and cleaning up costs. These costs would not have been incurred if the meal had not been served. These costs will increase directly in proportion to the number of meals served. On the other hand, there are costs such as the hire of the kitchen, paid staff, advertising and so on that will be incurred and paid even if no meals are served.

Looking at our costs in this way, allows us to classify them in terms of the way they behave. Those costs caused by the delivery of our service – such as direct labour and materials – are known as variable costs. As the organisation delivers more to the community, or as service delivery increases, variable costs rise in the same proportion. Being able to identify the variable costs associated with delivery of the service you can then forecast what the costs will be for any given level of

service delivery. Unlike variable costs, the fixed costs an organisation incurs are those that need to be paid regardless of service delivery. They are still associated with the delivery, because they provide the organisation with the capacity to operate but are not specifically caused by the delivery of our service. Things such as salaries, rent, insurance, and utilities. These things are needed to be able to deliver the services, but they’re not expressly caused by delivery.

It makes sense that for a certain level of fixed costs we can provide a certain number of service deliveries, but to increase that number we may need another person, another vehicle or more space for example which will step up the fixed costs. As service delivery continues to increase, fixed costs will continue to rise in a step-like fashion. Each increase in fixed costs should then provide for a greater capacity for service delivery, which is why these fixed costs are sometimes also known as

capacity costs. So, in Mary’s Soup Kitchen her fixed costs would be things like Insurance, Utilities, Repairs and Maintenance and so on. By understanding what causes a cost to happen, you’re then in a better position to prepare more accurate budget forecasts and source the appropriate amount of funding for the objectives you are looking to achieve.

Tip number 4 probably sounds a bit obvious, right? Manage cash flow. It goes without saying that having the cash available to continue to operate on a day to day basis is critical to sustaining our service to the community. Understanding where the cash comes from, where it goes to, and when, allows you to forecast what cash will be available, or not, to use in the future.

A key foundation of managing cash is to recognise the difference between profits and cash and how they’re accounted for. We’ve talked about the fact that an organisation’s ability to generate a profit or surplus is useful for long term sustainability. That ability is demonstrated in the income statement that looks at how much income is generated, and the expenses incurred to calculate the surplus or deficit – the organisation’s profitability.

This uses the accrual method of accounting, recording income and expenses as they are earned or incurred and measures profitability. However, we don’t always receive the income or pay the expenses at the time as they are earned or incurred. Therefore, it can be useful to use the cash method of accounting that records income and expenses as they come in and go out to establish how much cash we have available to use.

The next step in managing cash flow is to prepare a cash budget. Based on what you know about when cash will be received and when it will need to be paid out you can put together a monthly cash budget to establish whether there will be any shortfalls or when there is excess cash available. This then allows you to plan for how the shortfall can be covered, or what is the best use of any excess cash, such as placing it on a term deposit while it is not needed, to generate more income.

Let’s have a look at a simple example of a cash budget for Mary’s Soup Kitchen for the next 3 months. Starting with beginning cash. This is the bank balance at the end of the previous period. Let’s say Mary starts with $20,000 in her bank account. The next step is the look at the cash coming in over the next few months and most importantly when it will be received into the organisation’s bank account.

Let’s say the organisation receives a government grant for $25,000 in month 2, and regular donations of $5,000 each month. In terms of the cash outflows or cash being paid over the next couple of months there are food and preparation costs of $15,000 per month, operating expenses including wages, insurance, repairs and maintenance of $2,000 per month. A total of $17,000 each month.

To calculate the cash position each month we need to first of all add up the cash inflows to calculate the cash available. So, in month 1 total cash available is the $20,000 beginning cash plus the $5,000 in donations received which of course equals $25,000. Secondly, we need to add up the cash outflows – which of course is $17,000 each month. So, in month 1 we have cash available of $25,000 and cash outflow of $17,000.

Therefore, our ending cash position is our cash available of $25,000 minus our cash outflow of $17,000 which equals $8,000. This $8,000 then becomes our beginning cash for Month 2 and the process starts again. We have $8,000 beginning cash plus the government grant of $25,000 and donations of $5,000 which equals $38,000. Total cash available for Month 2 is $38000 less the total cash outflow of $17,000 leaves an ending cash position of $21,000.

This $21,000 then becomes the beginning cash for Month 3. That, plus the donations of $5,000 gives us total cash available of $26,000. Total cash outflow in Month 3 is $17,000. So, the ending cash position in Month 3 is the cash available of $26,000 less the cash outflow of $17,000 which leaves us a final cash position of $9,000.

Planning out a month by month cash budget highlights where there may be shortfalls or excesses. Remember though, this is just a plan and if we don’t like the picture we’re painting we can change it and continue to change it until we come up with the outcome we’re looking for and getting the best use of our cash.

Tip number 5 is to manage growth. So, what do I mean by that?

For many organisations demand continues to increase for the services they are providing. As that demand increases and they have more customers or beneficiaries, so they will need more stock, more people, and potentially more equipment and space to provide for that growing need. Almost invariably all of these things need to be paid for before you can get increased funding which means that they can become a drain on your available cash.

Managing growth is about understanding how much growth you can absorb within your existing capacity before you run out of cash. It’s about identifying the amount of cash you’ll need to support the growth, then establishing where that will come from, and finally whether growth actually is the best thing for your organisation, or whether you need to acknowledge that you’re at the limit of your capacity.

In Mary’s case the organisation experienced rapid growth within 12months; growing from serving meals one night a week in the local community hall to serving close to 100 meals every night from a mobile food van. As mentioned earlier it was only during this rapid growth and after a number of mistakes had already been made that Mary made the time to sit down and write a business plan to help her in applying for funding to be able to support the growth.

For a couple of months Mary was finding that she had to dip into her own pocket to keep the organisation operating. This was simply because of the rapid increase in demand for her service meant that the food and preparation costs associated with these extra meals rapidly increased causing the cash shortage or a cash gap.

Improved business planning and sourcing of funding though meant that Mary was able to manage her growth more efficiently meaning that the Soup Kitchen had a better chance of surviving.

Tip number 6 is to use resources efficiently. There are any number of resources needed by organisations to use to achieve their objectives however I commonly find that they are not being used as effectively as they could be. Let’s take a look at a few examples.

The resources available to an organisation to deliver on their purpose or mission include both the physical assets they use and the people and processes that get the job done. There are any number of ways that these resources can be used less than efficiently.

Let’s start with land and buildings, because it’s not uncommon for some organisations to have a significant investment in land and buildings either through ownership or renting. The question is whether you are getting the maximum usage out of these assets or whether they can be put to further use in either providing more services or potentially generating more income for the organisation.

Think about sporting clubs and schools for example that have large areas of land that aren’t used all the time. Some examples we’ve seen of where these organisations have thought “outside the box” are when they fund-raise by using their playing fields for car parking for large local events. Equipment utilisation is a similar story. How many hours a day, or days in the week, is the equipment being used? Is there a way it can be more fully utilised? Or are we better off hiring when we need it?

Then there’s the question of upgrading … particularly with technology … would we be more efficient with newer equipment, and efficient enough to justify the cost? Organisations should regularly review whether there are more efficient ways of doing things. This is part of the reason Mary moved from using the local community hall to a mobile food van.

In terms of stock or supply management … Mary’s Soup Kitchen needs to have strict processes around stock and supply management to minimise shrinkage costs, such as expired or spoiled stock that can’t be used.

I want to briefly touch on cash management too. We spoke earlier about being able to develop an accurate budget and cash flow which will help in understanding where there may be cash surpluses or cash deficiencies. Cash management should be about getting the best use out of any excess cash in a way that benefits the organisation such as additional earnings from investing.

It’s also about effectively filling the gap if there is going to be a shortfall. Similarly, any finance or bank lending should be structured correctly to suit the organisation’s cash flow.

Moving on to ‘People and processes’ starting with ‘Poor people management’. NFP organisations have the added complexity of managing a volunteer workforce as well as a paid workforce in some cases. One of the keys to managing this well is to ensure that your volunteers continue to come back year after year. You don’t want to lose their time and skills and risk not being able to replace them.

This can be achieved by implementing some simple people policies around development, recognition, and retention … just as for-profit businesses do. Volunteers want to feel that their time and skills are valued, and that someone is benefitting from their efforts. Similarly sponsors or donors want to feel that they get value for their money. Make sure that their involvement is recognised and promoted if you want to continue to receive their support.

Ineffective gran or proposal writing. We’ve seen many a submission for grant funding or sponsorship knocked back, not because it’s not a worthy cause, or the group doesn’t do good work, but simply because the submission hasn’t been crafted in a way that attracts sponsors, donors, or grantors to part with their money. It can pay off sometimes to actually employ an expert in this field to compile these submissions, or at least get someone else to read them as a litmus test.

Finally, Operations management. Having a well thought out and clearly articulated operational processes makes everyone’s life easier and more efficient. During the early days of Mary’s Soup Kitchen when there were just a few people cooking and serving the meals it was easy enough to communicate with each other about what had been done, what still needed to be done and so on, though they still found themselves getting in each other’s way and slowing each other down.

Ever heard that saying “Too many cooks spoil the broth”? That’s exactly what happened to Mary’s Soup Kitchen … as they grew rapidly and there were more people getting involved they actually became less efficient and while they were continuing to meet increasing demand the quality of their food slipped as there were too many people without clearly defined jobs to do, or an understanding of how to do them.

I’ve also heard from other groups that I have worked with that if they had had an operations manual in place from the word go, they would have been much more efficient and effective at what they were doing from the outset.

Tip number 7 is to plan for transition which simply means planning for change; in particular, changes where people enter or leave the organisation. And the best time to start planning for changes that may occur is at the very beginning … or now if you haven’t started already!

There are a number of potentially significant changes that can be planned for. We’re going to look briefly at 3 such changes that we recommend organisations should be planning for.

Firstly, when an individual leaves an organisation. People, whether they hold board positions or volunteer positions, come and go from not for profit organisations for a number of reasons and motivations can be very different whilst involved in the organisation. Transition planning helps us to manage these changes so that everyone stays aligned to the purpose and objectives of the organisation during this process.

Transition planning takes into account the impact of someone leaving, and how any negative impacts can be minimised. It also addresses where replacements can be sourced from, as well as what training newcomers to the organisation may need. Getting the right person in the right role is critical in all organisations.

Therefore, it is important to understand the part each role plays in the organisation and the skills and behaviours needed to fulfil the role to effectively be able to replace an individual that leaves.

Think about the impact of Mary leaving the Soup Kitchen. That would leave a huge gap to be filled and without someone with the drive, passion, and knowledge like Mary there is a distinct possibility that the organisation may not be able to continue to achieve its goals and objectives.

It’s also worthwhile to think about how an organisations purpose may change over time, or what happens when the organisation achieves its objective. For example, what if one day a cure is found for a disease such as cancer? This would have a massive impact for hundreds of organisations! Will the organisation wind down? And if so, how? Or will it be re-purposed?

What might this look like and how might it be achieved? While a cure for cancer may seem a long way off there are medical advances happening every day, so this is a constantly changing landscape that needs to be considered.

Another change that organisations may be faced with is the opportunity to partner or merge with a similar organisation. Whether it is to achieve economies of scale in the cost of the service or in the sharing of resources, the merging of similar purposed organisations can have its advantages.

It’s important to ask though, how do we still achieve the goals of the smaller organisation in the now larger organisation? And how does achievement of those goals support the achievement of the larger organisation’s goals? Is the achievement of both sets of goals enhanced through the partnership or merger?

For example, Mary’s purpose is very similar to parts of the Salvation Army. Could there be benefits in partnering with the Salvation Army for Mary? Or could that then lose the local flavour that is so important to Mary? These are all important considerations that would ideally be addressed in an organisation’s plan.

So, there you have it … our 7 financial tips for Not For Profit’s Have a plan, not just a mission. This will help to clarify what your objectives are and why, how you are going to achieve them, and whether you have achieved your mission.

Understanding and monitoring the financial position of your organisation enables you clearly articulate to stakeholders how the organisation is going financially and helps the organisation to better manage its finances to be able to deliver more effectively on its mission or purpose. Understanding your costs to deliver on your purpose or mission assists with budgeting and allocating income, as well as managing cash flow.

By understanding the impacts of growth on your cash flow and managing that growth effectively you will become a more sustainable organisation. Efficient use of your scarce resources enhances your ability to deliver more effectively and provide more benefits to the community.

And finally planning for transition means you should always have an efficient and effective team. Implementing these 7 tips will help your organisation be more financially sustainable to help you continue to do your great work in the community.

Thank you for viewing this video on 7 financial tips for Not For Profits. I encourage you to check out the other resources on the Davidson Institute website to help build your financial confidence.