Sixty percent of human services non-profits are financially distressed.
A sobering statement in the March 2016 report, New York Nonprofits In The Aftermath Of FEGS: A Call To Action, prepared by The Human Services Council in the wake of the sudden March 2015 closure of the Federation Employment and Guidance Service (FEGS) in New York (see FEGS Budget Crisis Changes Landscape Of New York Mental Health Service Delivery).
Then last month I read the piece, Can You Tell If Your Organization Is On The Financial Brink?, by my colleague and OPEN MINDS chief executive officer, Monica E. Oss, and it made me think again about where that “financial cliff” is for non-profit organizations. The news is full of such closures. There is FEGS. There is Riverwood Centers in Minnesota in 2014 (see Minnesota’s Riverwood Centers Locations Shut Their Doors, Patients Scramble For Care). And there are many more:
- Michigan’s Judson Center To Close Adult DD Group Homes Due To State Funding Cuts
- Community Counseling Center Of Chicago Averts Closure, Joins Cook County Medicaid Managed Care Plan
- Funding Woes Force Closure Mental Health America In Beaumont
- STAR Academy Juvenile Facility To Close In April
- Solid Landings Behavioral Health To Close Dozens Of Sober-living Facilities
- California’s Lockewood House Home For Developmentally Disabled Youth To Close
- Pennsylvania’s Counseling Firm Life Management Associates To Close
- Queens Charity For Kids With Severe Mental Health Issues To Close Down With $10M In Debt
- Illinois’ Maryville Academy Plans Mental Health Hospital Closure.
Having spent time as a chief financial officer (CFO), I have both an emotional reaction and a desire to understand what warning signs were missed by the leadership of these organizations.
There are a number of factors that create financial risk for community service providers – a combination of low rates of both government and health plan contracts with no rate increases, coupled with increased costs (wage competition, increased compliance regulations, IT requirements to “stay in the game”). The result is thin margins or deficits year-over-year.
A large part of our role as executives is to identify strategic solutions to these issues, and execute plans to implement the necessary changes. There are a number of strategic approaches that can be used, such as creating new services, closing services that no longer align well with the mission, and forging new collaborative partnerships with the community and/or with payers.
These are long-term issues that need new, long-term strategies – but that takes time and capital. In the meantime, how do you avoid announcing one day – to clients, employees and the public – that you have run out of cash and are closing your doors? What steps should an executive take to have confidence when he/she goes to sleep at night, that there will be cash in the bank in the morning? There are a full range of systems and activities to keep an organization healthy, but as I reviewed some of the non-profit closures, I saw four key themes.
Cash – When maneuvering through financial challenges and change, make a habit of knowing the status of cash. How much cash is needed daily – and how much is coming in by source? How much cash is going out daily – and how does that compare to the cash coming in? Review the cash forecast regularly. Cash spent at a greater rate than it is being received – known as burn rate – or a line of credit not paid back during the monthly revenue cycle, are indicators of operating issues.
Internal Controls – Every organization should have financial processes in place to ensure the integrity of accounting data and the financial statements. These controls should include documented processes, multiple staff trained on each key process, and assurance that no one individual has control over any key process. Internal controls ensure accountability on the part of financial staff. An annual audit of the financial statements will include a review of internal controls – both what controls are in place, and the extent to which they are practiced.
Financial Statements – Financial statements should be prepared monthly, and should include comparisons to projections and prior period results. Key financial result indicators should be trended and reported to the board each month. And the annual audit will help ensure the integrity of the financial statements – confirming that they are based on reliable accounting data and solid internal controls. An additional step is to monitor key financial ratios around cash, receivables, and debt. These ratios will provide insight into trends, and facilitate benchmarking the health of your organization to others.
Transparency – A culture of transparency around financial results is perhaps the most important factor. Ultimately, reliable financial information comes down to the knowledge, integrity, and transparency of financial staff. Sarbanes-Oxley legislation and U.S. Securities and Exchange Commission (SEC) requirements (for-profit) and the IRS Form 990 (non-profit) are aimed at ensuring transparency. However, creating a transparent, open culture in the finance department is the foundation for trust in the data. Sometimes this requires a change in staffing to get the right people leading the financial functions. Having the right people in place is a critical success factor.
There are a number of other factors that should be addressed to keep an organization financially healthy, but I think that these four are critical – monitor cash, create accountability through internal controls, report and monitor results, and create a culture of transparency with the right staff.
For more on keeping your revenues healthy, join the OPEN MINDS team on August 24 at The 2016 OPEN MINDS California Management Best Practices Institute, for the session, “Diversifying Your Revenue Streams: How To Successfully Launch A New Service Line.”