March 2008 NEWSLETTER
William Harper Associates Newsletter
This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus, like everything we do, is on helping organizations that do good, do better!
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In this issue:
- FEATURE ARTICLE: Managing in Challenging Times
- NEWS AND RESOURCES: Study Rates Not-for-Profit Leaders Tops
- QUICK TIP: Record Retention
- NEWS AND RESOURCES: New CRA Filing Requirements
- FROM THE ARCHIVES: Should we change our budget when our plans change?
FEATURE ARTICLE: Managing in Challenging Times
Recession, inflation, stagflation. There's no consensus about what's around the corner for the North American economy, but there seems to be more bad news than good (but ain't it always so?). Whether you think things will get better, worse or stay about the same (me? I believe that things will be pretty good over the coming year or two ... at least here in Canada), there's no doubt that the times will continue to be challenging.
So, what can be done to ride out – even advance our missions in – challenging times? Well, most not-for-profits have been on this wild ride for years, so we may be tempted to think that we're doing everything we can to cope. But, it never hurts to take a fresh look at some of our practices.
This month, we offer three DO's and three DON'Ts for these times.
Don't ... risk what you can't afford to lose
Whether talking about surplus cash or the organization's reputation, this is a sound rule at the best of times, and vitally important in challenging ones: don't put an asset on the line if you can't afford the possible negative outcomes. So, in terms of investments, the superior rate of return apparently offered by, for example, equities has to be balanced by the risk of negative returns (i.e. losses) if the markets decline. In terms of your reputation, there may be financial or other benefits to sponsorship or endorsement arrangements, but these have to be carefully weighed against the possible damage to your reputation that might come from the actions of a third party.
This is not to say that you should avoid all risks: simply that you should put a prudent risk-management approach into place with a clear boundary around unacceptable outcomes. One rule of thumb is that if a particular arrangement is causing you to lose sleep at night (or should be!), then it is probably not worth the risk that you are taking on.
Don't ... be penny-wise, pound-foolish
Tough times call for belt-tightening, right? Well, yes and no. Certainly deferring discretionary outlays of cash can be an important means of survival. You must be selective, however, about what benefits you are foregoing, and for how long. Putting off a fresh cost of paint in your office space for three months until funding uncertainties have been settled is a pretty reasonable deferral. Endlessly putting off required health and safety procedures, or foregoing important software upgrades may be something else entirely.
The key is to always keep in mind the benefits of these expenditures even where the benefits may be very subtle and unquantifiable or long-term. What value do you place on employee safety and compliance with the law? How about the availability of ongoing software support for mission-critical operational applications, or access to powerful new functionality in your fundraising software? Putting off “discretionary” fundraising activities can spell “short-term gain for long-term pain”.
Don't ... surprise your partners
Funders, employees and key suppliers such as your bankers and auditors all build their relationship with you on trust. Violating that trust can have devastating consequences. So, if things do start to turn negative, don't play the strong, silent type. (On the other hand, don't be Chicken Little – see the final “DO” below.) All of these key stakeholders want you to succeed – that's why they are working with you in the first place. And, they all know that times are challenging, too.
In fact, if you talk to these partners to share your current circumstances, odds are they will already know (or fear) what you are telling them. The positives of telling them, though, are that they will know 1) that you are being upfront with them; and 2) that you are aware of – and hopefully dealing with – the challenges you are facing. And, this latter point is key: don't just take your problems to your stakeholders, take the possible solution, particularly where they have a role to play in that solution. You may be pleasantly surprised how supportive your stakeholders will be, and how they might even be able to offer advice or assistance that you hadn't thought of. There really is strength in numbers, and it is never more true than when time are tough.
Do ... keep your options open
With storm clouds on the horizon, it's important to have options. So, everything you do should have a measure of flexibility built in.
Whether hiring an employee, negotiating a lease agreement, or offering programs, it is important to try to prepare for that rainy day. Rather than adding an employee as permanent full-time, consider a contract position or part-time employment. Negotiate that lease for office space on flexible terms that let you be responsive to major funding changes. And, try to structure your programs so that they don't institutionalize continuing reliance on them (easier said than done, of course). To the extent possible, everything should have alternatives built in.
Do ... prioritize
Difficult times impose difficult choices. And, having kept your options open, the key to making the best of a difficult situation is to have thought through the pro's and con's of those options. The middle of a crisis is not the time to start weighing your options!
Might you need to preserve cash? Consider what expenses could be deferred, and what are the implications of each. Need to cut back on programs or initiatives? Think about which programs and activities are most central to your mission and most relied upon by those you are serving. Need to reduce payroll? Look at your options, including adjusting benefits, hours of work, and pay rates, as well as the difficult option of laying staff off.
When the time does come to make a difficult choice, advanced planning and prioritizing won't make it easy, but it will make it likely that you'll make the best choice, and do so with as little agony as possible.
Do ... maintain a positive outlook
Sure, times are tough. But, you are good! You've survived worse than this, and you can survive the current challenges too. One important step in doing so, however, is not losing sight that you can and will do so!
Think back to all those stakeholders that want you to succeed. They want – need – to hear that you think you are going to succeed. They want to be confident in your ability to do so, and they can't be confident if you're not. (Of course, confidence needs to be backed up with good, realistic plans.)
So, no Chicken Little. No Pollyanna, either, mind you. Just a good, realistic plan, the commitment and energy to deliver on it, and a positive outlook and mindset so all the world knows you will deliver.
NEWS AND RESOURCES: Study Rates Not-for-Profit Leaders Tops
Now, this should properly make you feel better: A recent (US) study found that not-for-profit leaders scored higher than for-profit leaders on leadership practices in 360-degree performance reviews. Of course, it is no surprise to us in the sector that our organizations are fundamentally more complex than for-profit organizations, so it is reassuring, more than flattering ,to think that our performance as organization leaders is up to the task. To coin the old phrase, that's why we make the big bucks!
The full article can be viewed at:
http://www.nonprofitquarterly.org/content/view/165/1
QUICK TIP: Record Retention
Most of us need look no further than our own desks to know that the “paperless office” was just a cruel joke. Paper is everywhere. So, the temptation is to get rid of paper that is no longer needed.
But, what is needed? What needs to be kept and for how long? The safe, but completely unrealistic, solution is to keep everything, forever: “you never know when you might need xxxxx”. Realistically, the answer to this question needs to be much different.
First off, there are some specific requirements that give you a baseline. CRA requirements for charities, for example, generally call for six years of records to be held. Some records, such as corporate charters, records of 10-year gifts, etc., must be retained permanently, while copies of charitable receipts need only be kept for two years after the year of issue. There may be other statutory requirements depending on your circumstances.
Beyond these requirements, however, what to do? The most important thing to do is to have a records-retention policy, and to follow it.
Should a particular record ever be demanded, whether by a government agency or by a court, it is important that the record be available – or not – in accordance with an established policy. Failing to do so opens the organization up to charges of manipulation (think, Enron) and selective destruction, thereby possibly prejudicing your position.
Beyond this, you need to consider the nature of your operations. Specialized fields (e.g. health care) will have specialized requirements which you need to understand and follow. You need to have a risk-management approach to balancing the costs and benefits of retaining old records. And, you need to document your decision in a policy, and follow that policy at all times.
NEWS AND RESOURCES: New CRA Filing Requirements
Taxpayers expecting refunds or rebates of income tax, GST, etc. are required to be up-to-date on all required CRA returns and filings before these refunds or rebates will be processed for payment.
We understand that, effective April 1, 2008, these requirements will also apply to not-for-profit organizations, apparently implying that incorporated NPOs expecting rebates will be required to file a corporate income tax return even though no tax is applicable.
The notice (which indicates an April 1, 2007 effective date, even though we understand it to be April 1, 2008) may be viewed at:
www.cra-arc.gc.ca/tax/business/topics/gst/charities/rebates/menu_ch-e.html
We suggest you speak to your accountant or auditor about this to ensure that the payment of GST rebates to you is not unduly delayed.
FROM THE ARCHIVE: Should we revise our budget as our plans change? (from March 2007)
Recall that your budget is simply the financial expression of your business plan. It reports on the dollar/financial aspect of your plans. And, as we all know, plans change. So, should the budget be changed along with the plan?
The short answer to this question (like so many …) is "yes", and "no". So, let's look at some of the reasons for revising your budget, and some of the reasons for NOT revising it, and try to come up with rules of thumb for what to do.
TO CHANGE …
For many people (and this includes many accountants), actually producing one budget per year is quite an accomplishment in itself … the idea of revising it, producing another budget for the same period, is really quite daunting. So, why would we?
1. Legislation, regulations, or funders require it. If it's a requirement, by law or funder condition, that's usually the end of the argument. But, remember that budgets typically serve multiple purposes for your not-for-profit. If a revised budget is needed for one purpose (e.g. to support a funding arrangement), that doesn't necessarily mean you have to use it for every purpose (e.g. managing your operations). You do have to keep straight which document is for which purpose, of course!
2. It keeps the Board up to date. Major changes in circumstances (e.g. loss of a major funder and the resultant termination of a program) can have a pervasive effect on an organization, and occasionally it's difficult to see all the effects of a change. A new budget may be needed to reflect the new reality and understand what the new plans mean to the organization. Less dramatic changes are often better presented as variances from the existing budget, however, so that the Board and management can still maintain their focus on where they want to head.
3. It's the most realistic view of where we are going. There is another concept that needs to be introduced here, and that is the concept of a forecast. Just like a weather forecast, a financial forecast is simply our best prediction of what is going to happen. And, that may well be different from what we planned to have happen! In more sophisticated environments, separate forecasts are prepared, particularly as the end of the year (and next year's budgeting) approaches. This provides valuable information for imminent planning activities, that a budget is just not designed to provide. If you feel the need to update budgets with actual and anticipated information, you are probably best advised to do this, but label it for what it is: a forecast.
OR, NOT TO CHANGE …
1. Well, it IS a lot of work! You bet! Make sure the value added from this exercise exceeds the effort put into it.
2. It's confusing to the Board and others looking at various reports. Yes, it can be, especially if you revise it more than once during the year. The key is to clearly label every document you prepare (a good idea anyway …), and double check that everyone is (literally) on the same page.
3. It hides the very changes that we need to focus on. If we revise a budget to take into account everything that varies from one budget presentation to the next, it can get very difficult to keep in mind just what those variances were, why they occurred, and what we should be doing about it.
4. It undermines accountability and performance measures based on the original budget. Holding people accountable for accomplishing what they set out to do is an important part of achieving your mission, and moving the yardsticks every few months really can obscure the targets, objectives and remaining challenges to meeting them.
So, what's to be done? Our recommendations are as follows:
I) Don't revise a budget for a period unless there have been truly pervasive, dramatic changes that serve to render the existing budget (and plan) completely irrelevant.
II) If you need a specific-purpose budget that varies from the approved budget (either in presentation or content), then a) label it conspicuously with the special purpose that it is for; b) limit its distribution to the relevant recipients; and, c) prepare a reconciliation between the special-purpose and approved budgets so you can always zero in on why they differ.
III) Remembering that the budget is only the financial representation of the operating plan, be willing to prepare and present a forecast statement to show your best estimate of the results of upcoming operations, and label it clearly as such.
IV) If there are numerous differences between the budget and actual results, prepare a variance analysis that explains why things are different from the plan, and focusing on which variances are temporary/timing related, and which are permanent differences.
Having a practical planning, budgeting and reporting process in place makes these steps manageable (if not actually easy!). William Harper Associates has broad experience in helping not-for-profits implement cost-effective, practical processes - call us for help!