There is increasing pressure on tax-exempt entities to deliver expanded services within tightening budgets and cash flow constraints. This can mean re-visiting existing operations and identifying ways to streamline costs, freeing up those monies for re-allocation to new services. The idea is to perform this exercise annually—before pressure from cash needs boil over, requiring a serious restructuring of both operations and external funding sources to place the organization back on track.

The Issue

Budgeting is still viewed by many tax-exempt organizations as an administrative function with “budget battles” dragging on well into a new fiscal year. Annual operating plans often aren’t finalized until the first quarter has been completed. This is particularly critical for cost-saving efforts where lead time is required to implement full-year cost reductions and realize savings so money is available for new projects. Often, expected impacts of these new projects are baked into an organization’s top line (revenue) and that revenue commitment is not relaxed when those projects are delayed due to operational/financial issues. That lagging revenue plus lingering cost put pressure on cash, forcing entities to tap their funding sources or reserves (e.g. investment accounts, lines of credit) to meet liquidity needs, resulting in a “yellow light”.  When this scenario is repeated quarter after quarter, or year after year, that yellow light can change to red.

Constraints

Tax-exempt entities are often working in arrears; e.g., approved changes in state-approved billing rates, or reimbursements for spending, can be delayed – sometimes significantly – by elements outside the organization’s control.  A financially healthy organization can weather these delays. Those that are already stressed aren’t so fortunate. Others have a pattern of an elaborate cost-plus budgeting cycle that can be very hard to break. Firms where salary and benefits make up the majority of their costs are seemingly trapped; benefit costs are rising faster than revenues and salaries must go up at least marginally. Taking on new services means increased overhead to manage, report and monitor. What is the solution?

Some Answers

Plan ahead.

Think like a business. Sounds simple, but many tax-exempt organizations do not forecast their cash needs two to three quarters ahead; much less two to three years. The number one benefit of any forecasting exercise is it forces you to consider what must be done now to meet future targets, thereby syncing operational plans and needs with the financial forecast (budget = year one forecast). The short-term answer can be as simple as a good scrub of operating plans. Do I need a staff of 10 to handle expected volume, or will six suffice?  Does anyone utilize these reports or can I just stop producing them? Our financial team spends 40 percent of its time redoing rate cases; what causes that spend and delay? Longer-term considerations mean looking at new projects in a realistic way; i.e., are they consistent with our strengths, do we have the capacity, how much financial slack is required if things go slow (or wrong)?

Operate, don’t administrate.

Often, significant operational and financial corrections can be required. There may be a tendency to wait until there is overwhelming evidence to change or 100 percent consensus to act. Much of this stems from a mentality that tax-exempts are in the business of creating sustainable solutions to social problems, not creating profits – they don’t need to change or innovate. Not true. Tax-exempts will be compelled to adopt more for-profit techniques to stay viable and accomplish their goals.

You succeed or fail as a team.

This is the hardest nut to crack. Creating sustainable solutions to problems increasingly requires both intra-agency and inter-agency partnering. Often these agencies have been siloed by funding policy, service regulation, virtual monopoly on addressable markets, or privacy of information. Breaking those barriers down won’t be easy. Yet it is a challenge that must be met.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.


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