#3 – COVID 19: Difficult financial decisions
While certain organisations are finding opportunities to extend their work during the lockdown, some non-profits are experiencing serious cash flow difficulties, particularly those that generate income through activities that they are no longer able to carry out. Even organisations fortunate enough to have cash in the bank may nonetheless face difficult financial decisions, such as:
- Do we close down some or all of our operations?
- Can we afford to continue to pay staff?
- Do we use our reserves or savings to pay staff and other critical costs?
- Do we “borrow” or use restricted funds intended for other purposes?
Some decisions are out of our hands, but for other decisions, we need to carefully consider our options with caution.
The knee jerk reaction for most of us is to respond to the immediate needs as best we can, including continuing to pay the salaries of our staff, and putting every effort we can into providing relief and essential services, even those not firmly in our remit or related to our objectives as an organisation.
Here are a few practical steps towards making good financial decisions at this time:
- Establish your current net financial position:Take the total current bank and investment account balances plus what is owed to the organisation (and is reasonably expected to be paid) less what the organisation owes to others at this time, and less amounts that are restricted that may only be used for specific purposes (not for core costs).
- Establish the current monthly basic core costs (expenditure), including staff costs and other critical unavoidable costs.
- Calculate the Survival Ratio:Take the net financial position (calculated in 1 above) divided by the monthly basic core costs (calculated in 2 above) to get to the number of months that the organisation can continue to pay its current monthly basic core costs.
- Armed with this information – we recommend the following further steps:
- With regards to restricted balances held – communicate with your funders urgently to establish if restrictions can be lifted and funds redirected.If agreement is reached that these funds can be used to pay for core basic costs, it can result in an increase in your net financial position and your survival ratio.
- Follow up on any amounts due to your organisation, whatever this may be, whether grant funding or trade or loan receivables, and get these amounts into your bank account as soon as possible.
- If the organisation does have any existing liabilities, explore options to defer payments. Banks are particularly receptive to this right now.
- Consider any other potential sources of funding and support that can contribute towards to meeting the financial obligations, particularly to staff.This includes accessing relief funding announced by government and others. See other Ziyo COVID 19 newsletters for details.
- Carefully consider the possibilities of cutting or delaying costs including temporarily reducing salaries or even cutting staff numbers. Also, consider avoiding committing to new fixed costs, such as entering into contracts or hiring new employees. While these are serious decisions, remember that the lower your organisation’s costs, the higher the survival ratio, and the longer the organisation can survive.The new relief measures announced by government and others, as well as the existing mechanisms through the Department of Labour and UIF (Unemployment Insurance Fund) are definitely worth investigating.We urge you to go the website www.labour.gov.za and make those calls and send the emails.
- Finally, forecast and manage your cash flows carefully over next twelve months, taking advantage, where you can, of deferrals and delays of payments available to you, for example the partial deferral of PAYE payments,while also being sure to avoid any penalties and interest by ensuring you are able pay amounts on or before the due date.
In our following articles, we will unpack more details around measures available to support employees and non-profit organisations.
Ziyo is available to assist you to take the above steps and provide support and advice around these difficult decisions.
Please do get in touch to arrange for a consultation.