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Children's Voice Article, July/August, 2005

The Financial Crisis

What's a CEO to do?

By Charles Baker

Find yourself in a hole where expenses exceed revenues? Thinking about layoffs and closing programs to make ends meet? It is cold comfort, but you're definitely not alone--many agencies are facing difficult times.

Here's a more or less sequential list of activities a chief executives can pursue to heal the financially sick organization, in nontechnical financial language.

The Right Mind-Set

First, you might need to readjust your thinking about the organization. Note the reference above about healing the organization. This is a critical mind-set for long-term success. Think of your agency as a living, breathing organism, not a machine. Make a deliberate effort to drop language like, "Get things back on track" or "Take it apart and put it back together." These tend to make you think you are merely operating a piece of machinery.

When you think in a machine-like fashion, you'll naturally place the emphasis for change on your own shoulders, and you'll tend to assume you'll be taking some painful, and lonely, actions. More effective, long-term organizational improvement is about how you, the Board, and all staff can learn to collaborate in what is likely to be new thinking and new directions for the organization.
Get the Data Second, collect a wide assortment of financial data to assess, as realistically as possible, a complete picture of the agency's financial health. You may be asking the accounting staff for some things they don't usually do; but to diagnose the patient, you need a managerial, rather than a fiscal, perspective.

Here's some of what you need:

Timely monthly reports. To make progress, you absolutely must have monthly financial reports by the 15th of the subsequent month. For example, by May 15, you must have complete reports for all your financial activities in April. Why?

If you don't have at least two weeks each month to make changes that will impact next month, an effective turnaround is unlikely. Despite protests from the staff, this is a realistic timeframe. Much will be expected during difficult times, and your staff should expect overtime work.

Weekly cash-flow information. Monthly financial statements will report accrued data. This means you expect to receive certain payments, but you probably don't actually have the money yet. Mean-while, you owe payroll and other bills, but you may not have enough cash to pay those bills. Organizations or businesses often have positive financial statements but experience cash-flow problems because one or more customers are late paying.

This is the one financial problem most often misunderstood by board and staff. It causes you to borrow money to pay your own bills, or delay paying them, in hopes that revenues will catch up. To monitor cash flow, have the accounting staff prepare a brief report every Monday morning that shows
  • how much money you have in the bank right now,
  • how much money you need this week to meet payroll and other expenses,
  • how much money you expect to receive this week, and
  • how much money you have left in your line of credit or loan account.
The report doesn't have to be more than a half page. Every Monday morning, you and senior staff should have a 10-minute meeting to review this report. Everyone will know the week's critical issues.

Monthly trends of revenues and expenses. Every month, direct the accounting staff to prepare a 13-month rolling revenue and expense chart, exclusive of gift income. You want to see a set of green (revenues) and red (expenses) bars on a chart for each of the past 13 months. Since gift income is often restricted and relatively unpredictable, compared with revenue earned, exclude charitable receipts from this report. The "rolling" nature of the chart means that if the current month is May 2005, then the first month on your chart will be May 2004. For next month, the chart will be June 2004 through June 2005.

Return on investment. For a really long-term view, ask the accounting staff to collect the organization's audits for the past 10 years. Take the total revenue for each year and subtract the gift income, resulting in the amount of revenue earned (RE). Next, determine the organization's total program and administrative staff (PAS)-take the number of employees for each year (combine part-time employees to create full-time equivalents) and subtract the number of development or fundraising staff. Divide RE by PAS for each year to calculate total dollars earned per staff member. Create a line graph for the 10 years to see if your staff has become more or less "productive" over the decade.*

Now that you have some data, share what you've discovered with your senior management team--the thinking of an experienced consultant might also be helpful here--and begin an action plan. A good plan will probably include both revenue increases and expense reductions.

Cost reductions are usually easier to find, so here we'll concentrate primarily on revenue enhancement. The first consideration should be increasing revenue per employee. Since many child welfare contracts are for fixed amounts, simply asking customers to pay increased fees may not be possible, but salvation may be in the details.

Keep in mind, the power vested at the top of the organization can reduce expenses, but only the power at the bottom of the organization can maximize revenues. Unfortunately, as CEO, you probably don't know enough about all the operational details to make a difference. You will need the dedicated help of front-line staff to identify and exploit these seemingly small differences.

For example, one residential program was in financial difficulty and hadn't received a rate increase in six years. While assessing the agency's situation, senior staff calculated an average daily utilization rate of 85%. This is calculated by dividing the total number of days of service by the program's capacity. In this case, 85% of the program's beds were filled during the year. This is a very good rate, easily exceeding that of most hospitals. Senior staff, however, asked direct staff if they could think of ways this good rate could be increased.

Line staff reported if referrals were processed earlier, and accepted youth placed on a standby list, the program could discharge one child and admit a new child to fill that bed on the same day. In a few months the agency's utilization rate increased to 95%, increasing their monthly revenue.

Engage Staff

When looking for ways to trim expenses, one of the first things on everyone's list is likely to be downsizing. Be very careful about jumping into this as a first action. Remember, the agency is a living organization. Layoffs are like surgery, and some surgery can put the patient in recovery well into the next year. Consider other alternatives first.

In nearly every organization, the CEO will need the help of every staff member to realize all the possible revenues and savings. Getting their help and support may be more difficult than you realize, and beginning the turnaround plan with layoffs can make collaboration much more difficult. Staff who are fearful of losing their jobs aren't eager to work collaboratively.

Engaging everyone in joint solutions means expanding participation. This requires letting go of the notion that financial information is confidential. As a matter of fact, you'll have to find ways to share fiscal data that everyone can easily understand, right down to the maintenance staff.

Here's one way to begin the process:
  • Call a general staff meeting. Have more than one if shift work or geography requires it--make sure everyone attends. The CEO must lead this meeting.

  • Create a half dozen or so large, poster-sized charts, and position them around the room. Possibilities include monthly trends of revenue and expenses, return on investment, utilization rates, increase or decrease in employees, increase or decrease in gift income, and number of referrals--all over the past 5 - 10 years.

  • Divide employees into small groups (not by work teams) and ask individuals to move from chart to chart, taking notes for discussion in their small groups. This activity will have a nice chaotic, noncontrolled feel, and staff won't be thinking that preconceived outcomes are expected.

  • Each small group should discuss two questions:

  • What does each chart mean individually?

  • How do all charts relate to each other? Will change in one affect another?

  • Consider asking the board of directors to go through this same process. When they've finished their discussions, describe how the staff reacted.

  • Reassemble the full group and ask what they discovered and what surprised them.

  • Take all questions, and try your best to answer them. Do more listening and paraphrasing of their thoughts than trying to explain finances. End with a plea: This organization we love is facing some very tough times. Each of us needs to help find ways to both make more money and save money. You will be meeting as work teams next week--every possible solution you find can be helpful.
In time for those team meetings, accounting staff should prepare, from the previous month's data, a revenues-versus-expenses graph for each team's individual unit (each cottage, foster care team, group home, and so on). Each team will need to see this same chart by the 25th of each subsequent month. You'll be amazed how quickly these charts are posted on supervisor's walls and how quickly changes will take place.

A kind of magic happens when people clearly see an issue and realize they have friends and companions around to help work toward a solution. This turnaround process takes more than a good administrator; it takes a great leader to unleash the power of collaborative solutions.

Charles L. Baker is President of Baker & Company, Louisville, Kentucky, providing executive coaching and support for boards and executives. Contact him at charlie.baker@insightbb.com or 502/290-4316.


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