COVID-19: Managing cash flow for NFPs in crisis

The COVID-19 crisis presents not-for-profit (NFP) organisations in many sectors with an environment where the demand for their services is high and yet the capacity of their traditional financial supporter base is diminished. This is particularly so in the charitable sector. The arts community has been acutely impacted as a result of venue closures, as have member-based organisations who are dependent upon member gatherings and networking events.

How well NFPs respond to this crisis determines success or failure in turnaround. Many wrong decisions can be fixed, however indecision or taking too long to respond can have the most detrimental impact. Whilst there’s likely to be a resumption of normal activities at some stage in the future (arguably, the date of a vaccine but even before then there will be a resumption of ‘new’ normal activities), organisations must plan now for coming through the other side and make decisions today in that knowledge. 1

Directors of NFPs operate in a similar but different environment to their ‘for-profit’ colleagues. Similar in the sense that traditional solvency measures, like being able to meet the payment of debts as and when they fall due, and corporations law obligations are mostly the same. Different because there is often a higher order mission that extends beyond profitability and a return on invested capital and incorporates the collective values of sponsors, donors, volunteers, members and employees.

In the context of turning around a distressed NFP, effective collaboration between the board, management and financial/non-financial supporters is paramount. Government support and accompanying regulatory reform 2 is both allowing and requiring directors to lean into their organisations more than ever, as they focus on keeping organisation afloat, looking after employees and maintaining relationships with key financial supporters.

This director tool is an NFP-sector adaptation of COVID-19 Managing cash flow for SMEs in crisis and focuses on key tactics for NFPs in turnaround. It examines areas of priority for management, and oversight for boards, and reinforces the need for both to be resolute in their decision making and actions.

The AICD is advocating to both federal and state and territory governments for an urgent crisis relief package for the NFP and charities sector. Acknowledging that NFP directors (many of whom are volunteers) and senior management should be focused on providing services to their valuable clients, looking after their employees, volunteers and stakeholders – at a time when demand for services is up and revenues are down – the institute wants comprehensive measures to support the sector’s financial sustainability and a clear and nationally consistent regulatory approach. 3

Horizons thinking

The federal government’s current fiscal stimulus is designed to impact organisations over a six-month period (April – September 2020). NFPs materially impacted by COVID-19 not only need to consider the critical steps to survive these six months but they also need to plan now for how their organisation will resume activities – and in some cases rebuild – after this period.

NFPs should think about their organisation in the context of at least two horizons:

1. Survival – develop plans to get through the next six months;
2. Rebuild – develop plans to rebuild for the new normal.

For many NFPs materially impacted by COVID-19, their reason for existence will be restored or lost in the future rebuild. This means that decisions made now must be done through the lens of the rebuild, to avoid having nothing left when the new normal eventuates. 4

Boards should encourage management to do more than just survive (Horizon 1). They should encourage management to do enough so they can also invest in the rebuild (Horizon 2). This often translates when an NFP focuses on the trade-offs between competing stakeholders and financial supporters. For example, member-based organisations having to adapt to a new post COVID-19 operating model (for example, moving from face-to-face services to blended digital and face-to-face services) may have to redirect valuable sponsorship funds to digital delivery at the expense of traditional sponsorship programs suited to face-to-face delivery.

Another example of a horizons trade-off might be that operators in the arts community may determine that supporting artists financially, at the expense of a relationship with venue owners, is key because the loss of an artist would be harder to manage in the rebuild than finding a new venue in the rebuild.

How hard NFPs negotiate with sponsors and stakeholders will be driven by how much cash is required to rebuild the organisation and get it to sustainable surplus, not by how much cash is required just to survive the lock down.

It’s important for the board and management to agree upfront which battles to fight when considering such trade-offs.

Guidelines for horizons thinking

It is important for board and management to apply the following mindset when developing their organisation’s survival and rebuild plans:

• No one has a monopoly on the best ideas in a crisis, and staff and financial supporters will often have good ideas.
• Managing stakeholders is challenging and it is important to consider trade-off scenarios. Hoping that stakeholders will do exactly what is asked is not a prudent plan and a credible Plan B should be developed.
• Do not forget the reason for the NFPs existence. It is a very useful exercise to remind sponsors who have backed the organisation about why the organisation exists and what is being done to respond to the crisis.
• Cutting costs, improving margins, releasing cash from working capital and selling surplus assets is often cheaper and likely to be more controllable than approaching a financial stakeholder who themselves may be financially stressed.
• Consider the timing of asking a financial sponsor for funding. Right now, asking a sponsor for financial support might result in a very quick no. There is a time and a place to ask. It may not be now.
• Cutting costs is hard to do. Cutting in a way that is sustainable is even harder to do. It is rare, however, that anyone activating a critical turnaround plan regrets having ‘cut too deep’.

Changing strategy takes time – changing tactics can start immediately

Strategy is important but it’s very hard to develop and adopt a new strategy in the middle of a crisis. It’s somewhat like building the plane when you are already in the air! It is better to first focus on tactics to respond to the crisis because the outcomes that result may be very strategic in nature.

Typically developing a tactical plan in a crisis follows three phases:

1. Identify tactical options with an emphasis on cash release or cash generation;
2. Prepare a plan encompassing all identified tactical options;
3. Deliver against the plan.

This director tool focuses on the first phase and examines the following ‘levers’ that can provide immediate tactical options for managing cash flow in a crisis:

• Revenue and/or margin improvement;
• Working capital release and cost reduction;
• Staff cost reduction;
• Other sources of capital or government support.

Revenue and/or margin improvement

It is harder to win new financial supporters than to retain existing supporters. This is not to say that new supporters and members are not welcome. 5 However, when cash is tight and resources are scarce, it makes sense to focus more time on existing supporters rather than prospective supporters – and on the things that are more controllable rather than less controllable. For example, a review of traditional fundraising activities in order to identify creative/different ways of securing the same share of wallet from the same supporters can be an effective way of remaining relevant and top of mind. With the emergence of digital variations to existing face-to-face services, it may be viable to direct sponsors to support this new medium in order to differentiate their support from the old way of doing something.

Consider turning liabilities associated with pre-paid cancelled events, or already committed expenditure, into donations by asking creditors to convert a contractual refund into a donation.

Existing sponsors could be asked to offer additional non-monetary support that would enhance the NFP’s offering to the member or recipient services base. This enhancement might enable the NFP to ask for payment of existing or additional service fees.

Rather than asking for a concession from a supplier, it may be viable for the NFP to provide something creative in return. For example, where a supplier has a vested interest in the long-term future of the NFP, consider converting a ‘2019 payable’ into a ‘2020 investment’ in the future viability of the organisation. For membership-based NFPs, programs directed towards offering existing member promotions (for example, through online services), enhanced loyalty programs and early payment options are more controllable than investing in finding new members or new services in new geographies.

Working capital release and cost reduction

A laser-like oversight of cash receipts collection is critical during a crisis and for NFPs this should be a weekly exercise. Put in place a system of escalation if any expected cash receipt is late relative to their terms or commitment date. Deploy a 13-week rolling cashflow report for all board members to understand. A 13-week cashflow restates the NFPs receipts and payment runway (over 13 weeks) and in its simplest form is a forecast of transactions likely to go through the NFP’s bank account over this time. It is imperative that every board member has clear oversight of this report. 6

Spend time understanding what it costs to serve (CTS) customers and members. That is, costs beyond costs of goods sold (COGS) such as service and support. This enables the classification of customers/members into categories that may be ancillary to the core offering of the NFP. Whilst counterinitiative, consider letting go of certain customer/member categories or ancillary services, or charging more to provide these services or recovering more in pass through costs, in order to reset the overhead cost base (because there are less customers/members to service).

If a customer, member or sponsor was a poor payer before COVID-19, it is likely they will be an even worse payer now. In the current crisis, it’s prudent to also watch traditionally good payers. The federal government’s announcement of a six-month temporary relief for directors from personal liability for trading while insolvent (from 25 March to 25 September 2020) – extended to charities (enacted as part of the Government’s Coronavirus Economic Response Omnibus Bill 2020) – may result in a disrupted payment pattern. 7

Consider the available levers to get financial supporters to pay. For example, is it possible to preference the profile of one sponsor over another because they are committing to sponsorship at a time when it is needed most? Consider offering early payment discounts – now is the time for cash, not profit.

Creditors are likely to examine your organisation in much the same way you are examining your own customers, members and sponsors. Communicate and ask for extended payment terms and reductions in cost. Keep promises and don’t over commit.

Don’t forget to consider closing permanently or mothballing temporarily unsustainable sites, service units or branches. Consider mergers or partnerships as a means of sharing common costs to support a wider distribution network. This can be difficult to achieve in the short term but given the horizon timelines of six months or more, measures like this can be implemented over the medium term.

It is worth noting that cost reduction programs mostly fail to achieve 100 per cent of their targets. This is especially the case for sustainable targets. With this in mind, cost reduction targets should be set to exceed what is required to survive.

The AICD webinar recording Turnround Fundamentals provides general guidance on cost out and working capital tactics. 8

Staff cost reduction

After the safety and wellbeing of employees (and volunteers), the most important staffing priority for NFPs is to focus on both keeping employees and finding ways to lower their cost base. These may include measures such as securing voluntary pay reductions, roster changes, freezing of new hires, winding down leave balances and managing stand downs. It is critical that employees and employers work together to find the right solution for their organisation.

If an NFP finds itself having to consider redundancies, particularly when considering rebuild (Horizon 2), it may be useful to classify full-time employees into three categories:

1. Employees most closely related to the output of product or services (for example, front line staff);
2. Employees supporting the first category;
3. Senior management and indirect functions.

Use this classification to focus redundancies away from category 1 towards redundancies in categories 2 and 3. By doing so, the organisation preserves as best as possible those FTEs most closely working with clients or on the front line. When the rebuild plan is activated, the organisation can pivot and respond because it has retained (as best as possible) the front line workforce capacity to do so. Cut casuals before permanent staff; cut back office permanent staff (categories 2 and 3) before front line permanent staff. Some sponsors or donors may be able to offer services or idle staff for free to fill a gap in capability left by letting go of casual staff.

Finally, if you find that your organisation’s operating model needs to be reset (that is, because there are less customers or members to service), identify what roles are required first and then consider who would best fulfill those roles.

Other sources of capital or government support

The federal, state and territory governments have issued a significant range of financial and operational assistance for NFPs impacted by COVID-19. They are designed to relieve some of the crisis burden and deliver some rebuild support, and cover cash flow assistance, commercial tenancies relief, business investment incentives, access to credit and working capital, relaxation of regulatory and reporting requirements and government contract extensions. 9, 10

Some of the most significant cash flow initiatives to date include:

• The JobKeeper payment providing wage subsidies to employers significantly impacted by COVID-19;
• Tax-free cash flow boosts of between $20,000-$100,000 delivered through activity statement credits;
• Australian Taxation Office case-by-case adjustments to deadlines and payments of taxation and superannuation obligations.

The small business relief package is another potential source of government support for NFPs. It is a $250,000 ‘unsecured’ loan offered to by the federal government but distributed through the banks. 11 Each bank is managing the loan scheme slightly differently. The banks have been inundated with applications and for this reason it is preferable to access the loan though an existing relationship rather than approach a new bank relationship. NFP boards should be very clear about the ability of their organisation to repay and some lenders are requiring personal guarantees, and this becomes problematic for NFP directors at the best of times let alone during a crisis.

Finally, selling and leasing back new, existing, and aged plant and equipment on a non-recourse basis might be away to release cash for an NFP.

A final note

A key consideration for NFP boards and management facing the COVID-19 crisis is to quickly establish what the survive-and-rebuild landscape look like for their organisation. Many wrong decisions are fixable, but indecision or taking too long to decide can have the most adverse impact in a crisis.

Equally important, changing strategy may take time but changing tactics can start immediately and the most immediate stabilising tactic needs to emphasise cash flow:

• Cust costs to survive and earn the right to invest for the future;
• Cash is king – sweat the balance sheet;
• Understand duty shift and when dealing with stakeholders document clearly what has been agreed.

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Footnotes

1 A Cornell, 2020, “Gonski: keeping an open mind in crisis”, 19 April, bluenotes, https://bluenotes.anz.com/posts/2020/04/anz-chairman-david-gonski-covid19-coronavirus-qa, (accessed 20 April 2020).

2 AICD, 2020, COVID-19: Shifting regulatory landscape, 2 April, https://aicd.companydirectors.com.au/resources/covid-19/covid-19-shifting-regulatory-landscape, (accessed 21 April 2020).

3 C McGrath, 2020, COVID-19 and NFPs: government relief package needed, 14 April, Australian Institute of Company Directors, https://aicd.companydirectors.com.au/resources/covid-19/covid-19-and-nfps-government-relief-package-needed, (accessed 28 April 2020).

4 K Towey and C Ashton, 2020, COVID-19: Director priorities for NFP recovery plans, 24 April, Australian Institute of Company Directors.

5 S Dempsey, 2020, How not-for-profits can fundraise differently during the crisis, 1 April, Australian Institute of Company Directors, https://aicd.companydirectors.com.au/resources/covid-19/how-not-for-profits-can-fundraise-differently-during-the-crisis, (accessed 28 April 2020).

6 Refer also to A Whyte, 2020, “The impact of COVID-19 on not-for-profits with a December year-end”, 9 April, Membership Update, AICD.

7 AICD, 2020, COVID-19: Shifting regulatory landscape, op cit.

8 C Gunther, 2020, Turnaround Fundamentals, [webinar recording], AICD.

9 Social Ventures Australia and Paul Ramsay Foundation, 2020, COVID-19 Government Support for Charities and Not-For-Profits, 22 April, https://www.socialventures.com.au/assets/COVID-19-support-for-charities-April-22-2020.pdf?utm_medium=email&utm_campaign=Guide%20to%20Covid-19%20opportunities%20for%20charities%20-%20PRF&utm_content=Guide%20to%20Covid-19%20opportunities%20for%20charities%20-%20PRF+CID_dcf8c4d0cf72425d7e90477792056dc6&utm_source=Campaign%20Monitor&utm_term=short%20guide, (accessed 28 April 2020).

10 Australian Government, 2020, Support for not-for-profit organisations, https://treasury.gov.au/sites/default/files/2020-04/Fact_sheet_support_for_nfp_organisations_0.pdf, (accessed 28 April 2020).

11 P Ryan, 2020, Major banks to offer $250,000 loans to small Australian businesses, ABC AM, 23 March, [transcript], https://www.abc.net.au/radio/programs/am/banks-to-offer-$250,000-loans-to-small-australian-businesses/12080356, (accessed 21 April 2020).

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About the author

Carl Gunther GAICD retains several NED positions and is past National Turnaround Lead for KPMG Australia. He has over 25 years financial and operational restructuring experience in assisting companies and boards develop turnaround plans that make meaningful change within the first 60 to 90 days and provide a roadmap for stability. He is President of the Turnaround Management Association Australia.

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The Australian Institute of Company Directors is committed to strengthening society through world-class governance. We aim to be the independent and trusted voice of governance, building the capability of a community of leaders for the benefit of society. Our membership includes directors and senior leaders from business, government and the not-for-profit sectors.

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Disclaimer

This document is part of a Director Tool series published by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a starting point for undertaking a board-related activity. It is not designed to replace a detailed review of the subject matter. The material in this document does not constitute legal, accounting or other professional advice. While reasonable care has been taken in its preparation, the Australian Institute of Company Directors does not make any express or implied representations or warranties as to the completeness, currency, reliability or accuracy of the material in this document. This document should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, the Australian Institute of Company Directors excludes all liability for any loss or damage arising out of the use of the material in this document. Any links to third-party websites are provided for convenience only and do not represent endorsement, sponsorship or approval of those third parties, or any products and/or services offered by third parties, or any comment on the accuracy or currency of the information included in third party websites. The opinions of those quoted do not necessarily represent the view of the Australian Institute of Company Directors.