More and more we are starting to read in the news of nonprofit organisations going into liquidation and closing down. CMDS is often called on to assist organisations that are already in financial crisis for reasons such as:
- Inability to get a tax clearance certificate needed to secure funding;
- A dispute of one kind or another;
- Suspicion of fraud or theft;
- An unexpected but significant financial obligation to report or pay; and
- Threat of closure due to lack of funds.
In such cases we often find that the crisis could have been averted, or at least better anticipated and/or managed.
So what are some of the first signs of financial trouble for an NPO?
You might think that cash flow difficulties, particularly an inability to pay costs such as salaries, rent, and other running costs, would the first sign of trouble. However, it is our experience that cash flow difficulties today are the result of trouble that started much earlier and should have been picked up and addressed.
Trouble may be brewing at your organisation that you may not be aware if:
- Financial recordkeeping is not up to date - it is not uncommon for us to find that either no transaction capturing is being done at all or that capturing is months behind. The records of your organisation should be captured into an accounting package (such as Pastel or Quickbooks) and reconciled to bank statements to the end of the previous month by the middle of the next month. You do not even need to wait for the auditors to finalise the previous year’s records and reports to start capturing and checking the next financial years’ records;
- Financial reports are not presented to, or not considered regularly by, the management (monthly) or the board (quarterly);
- Financial reports are inaccurate or incomplete or do not agree to the underlying accounting records. Often, such reports are presented on Microsoft Excel spreadsheets with no reconciliation to actual balances in the bank accounts, in such cases, the information cannot be relied upon for good decision-making.
- The situation revealed by the financial reports is not fully understood or is simply ignored, appropriate questions are not asked and actions are not taken even when complete and accurate financial reports are presented and considered;
- Monthly cash flow forecasts are not prepared and scrutinised, starting with the balance in the bank today and realistically forecasting the expected cash inflows and outflows month by month showing the resulting closing balance of funds per month for the year ahead; and
- There is a lack of independent regular checking of the work of the finance person, who is often trusted to carry out all the necessary financial and legal obligations of the organisation unsupervised, including meeting the South African Revenue Services (SARS) requirements. This leaves the organisation vulnerable to the effects of normal human frailties, such as forgetfulness, omissions, errors or even fraud. Financial records and systems need to be regularly independently checked – not just by the auditor once a year so that the finance person can be held accountable.
What are some of the other tell-tale signs of trouble?
- Ongoing deficits - expenditure is consistently higher than income (or put another way the regular income is not enough to pay for regular expenditure) in general or for particular projects;
- Liquidity problems – cash in the bank today is not enough to pay the outstanding debt already owed today – so putting off paying what is due today until some money comes into the bank.
- Delaying payment of salaries to staff or payments to SARS for employees tax and UIF.
- Letters of demand for payment from suppliers, contractors etc.;
- Using earmarked grants and donations when received into the bank account to immediately pay outstanding debts;
- Taking loans – either personally or from others;
- Depleting reserves or savings – needing to draw down on savings and to cash in or sell investments or other assets to meet ongoing expenditure commitments;
- Borrowing from Peter to pay Paul – using money received for one purpose to pay for expenditure for another purpose often with the intention to repay when ‘other money’ is received. However, the “other money” gets less and less and finally dries up completely leaving you unable to replace the borrowed money and unable to report honestly on the spending; and
- Falsifying reports to funders to cover up the mess and get funds released.
Many organisations are constantly experiencing these challenges, so much so that many accept this state of affairs as ‘normal’ for an NPO.
What to do? Make sure that the organisation’s financial systems are sufficient and are operating effectively and that you are constantly aware of your organisation’s actual and accurate financial situation – be wise and take action earlier rather than later.
- CMDS is available to assist, advise and support your organisation. For more about the CMDS, refer to www.cmds.org.za.