Managing Cash Flow and Reserves

Transcription

1 Slide 1 of 30 Managing Cash Flow and Cash Reserves Flow (5 Nov 2007) and Reserves HO Yew Kee PhD, FCPA, CFA Associate Professor of Finance and Accounting Vice-Dean (Finance and Accounting) NUS Business School Member of CGFRC National University of Singapore

2 Slide 2 of 30 Since the NKF saga, the charity landscape in Singapore will never be the same again as there is a greater degree of accountability to donors and regulators. There is nothing wrong with change, if it is in the right direction. Winston Churchill (British Prime Minister during World War II ) Change becomes inevitable!

3 Slide 3 of 30 Major Changes & Expectations Expectations of NPO in being transparent, efficient and accountable. Getting passionate and qualified individuals with sound character to be involved in the Board, management and operations of NPO duo-challenges for finance personnel. Financial management Internal control proper in-house procedure Financial reporting public accountability Audit and compliance internal and external verification Corporate governance professionalism Better stewardship of financial resources (investment function)

4 Slide 4 of 30 Financial Importance of NPOs Name Year Land and Building ($'000) Property Plant and Equipment ($ 000) Cash & Cash Equivalent ($'000) Investment ($'000) Others Total Assets ($'000) Home Nursing Foundation 2007 NA $1,087 $17,746 $3,509 $382 $22,724 Singapore Children's Society 2006 NA $2,504 $17,046 $3,834 $904 $24,288 Catholic Welfare Services 2007 $702 NA $9,704 $14,362 $178 $24,946 YWCA 2006 $21,507 NA $2,535 NA $1,860 $25,902 Lion Home For The Elderly 2005 $18,400 NA $7,409 NA $1,272 $27,081 St Luke's Hospital 2006 $11,654 NA $11,388 $3,031 $2,621 $28,694 Ren Ci Hospital 2007 $5,327 NA $28,302 $8,137 $5,487 $47,253 MINDS 2007 NA $28,725 $17,680 $3,499 $919 $50,823 Kwong Wai Shui Hospital 2006 $39,009 NA $23,776 NA $1,715 $64,500 SATA 2006 NA $22,516 $5,809 $48,075 $1,112 $77,512 NKF 2005 $23,116 NA $23,648 $212,515 $15,401 $274,680 TOTAL $119,715 $54,832 $165,043 $296,962 $31,851 $668,403

5 Slide 5 of 30 Financial Importance of NPOs Name Year Total Receipts ($'000) Total Expenditure ($'000) Excess (Deficit) ($'000) No of Employees - Full time ($'000) Employees Cost ($'000) Home Nursing Foundation 2007 $4,444 $3,485 $958 NA $2,384 Singapore Children's Society 2006 $8,410 $7,495 $915 NA NA Catholic Welfare Services 2007 $4,920 $4,195 $725 7 $277 YWCA 2006 $11,975 $10,697 $1, $5,709 Lion Home For The Elderly 2005 $5,586 $5,300 $ $3,026 St Luke's Hospital 2006 $15,528 $15,183 $ $9,844 Ren Ci Hospital 2007 $30,254 $18,831 $11, $9,638 MINDS 2007 $31,011 $27,241 $3, $17,934 Kwong Wai Shui Hospital 2006 $11,568 $9,801 $1, $5,042 SATA 2006 $19,864 $11,753 $8,110 NA $6,198 NKF 2005 $97,985 $80,266 $17, $28,002 TOTAL $241,545 $194,247 $47,296 $2,500 $88,054

6 Slide 6 of 30 Scope of the Training Cash flow Management for NPO. Risk and Return Framework in Investment. The Prudent Man Rule Diversification Investment for NPO

7 Slide 7 of 30 Funding Framework for NPO Donations Cost Recovery Cost of Service Grants Other Income Social Enterprise Investment Income

8 Slide 8 of 30 Types of NPOs D NPO No Charges for Services (100% donations) (Emergency Relief Fund) DCR NPO Partial costs recovery and Reliance on donations (St Luke Eldercare) DCRG NPO Partial costs recovery + Reliance on donations + Government grant (Ren Ci Hospital, St Luke Hospital) DCRGO NPO Partial costs recovery + Reliance on donations or Government grant or Others (Social Enterprises, investment income) (NKF, PCS)

9 Slide 9 of 30 Relative Importance of Funding Possible Models Your Organisation Donations TYPES % Cost Recovery Others Donations Cost Recovery Government Grants Multiplier Effects Others Government Grants

10 Slide 10 of 30 Implications of Funding Model Certainty and regularity of the funds Cost of Service Need to make cash flow planning prediction of cash in. Need to have reserve to even out cashflow fluctuations. Need to have cash reserves to ensure no disruption of services. Fund and expense budget is critical for proper financial management of the NPO.

11 Slide 11 of 30 80/20 Principle Others Cost of Service Direct Service Expenses Ops & Admin Expenses Major Cost ($ 000) N Manpower Total Exp Mean Median 10 $78,416 $175, % 53.4%

12 Slide 12 of 30 Implications Significant amount of cost is fixed (approx. 50%). Cost of Service For morale purposes, cash needed to pay for manpower cost is critical. Operating cost is critical to ensure no disruption to provisions of services Cost is reasonably predictable and stable over time.

13 Slide 13 of 30 Building a Cash Flow Projection Model for an NPO

14 Slide 14 of 30 Periodic Cash Flow Planning Months Cash Outflow - Manpower Cash Total Outflow - Cash Out Others Cash Clients Revenue Donations Total Cash In Shortage Reserve ($500) Jan (51) (41) (92) (1) 499 Feb (51) (41) (92) Mar (51) (61) (112) Apr (51) (41) (92) (1) 516 May (51) (41) (92) Jun (51) (41) (92) (5) 511 Jul (51) (41) (92) (4) 507 Aug (51) (58) (109) (15) 492 Sep (51) (41) (92) (18) 474 Oct (51) (41) (92) (10) 464 Nov (51) (41) (92) (4) 460 Dec (102) (41) (143) (37) 423

15 Cash Flow Planning Safety Cash ($140) Investible Reserve? ($300) Mth Total Cash Out Total Cash In Nett Jan (92) 91 (1) Feb (92) Mar (112) Apr (92) 91 (1) May (92) 92 0 Jun (92) 87 (5) Jul (92) 88 (4) Aug (109) 94 (15) Sep (92) 74 (18) Oct (92) 82 (10) Nov (92) 88 (4) Dec (143) 106 (37) Mean (99) 93 (6) Min (143) 74 (37) Max (92) Slide 15 of 30

16 Slide 16 of 30 Financial Management Challenges Ability to forecast accurately the cashflow needs of the NPO need to ask what is the cash burn of the NPO. Ability to forecast accurately the potential cash inflows. Ability to model accurately the cash-in and cash-out of the NPO on a periodic basis (monthly). Ability to manage the reserves of the NPO making the reserves multiply to provide additional source of funding.

17 There is nothing more imprudent than excessive prudence. Name *1% ($1.64m); 2% ($3.28m); 3% ($4.92m); 5% ($8.20m) 2007 Ho Yew Kee, PhD, FCPA, CFA Charles Caleb Colton (English sportsman and writer, ) Total Expenditure Cash & Cash Equivalent ($'000) Investment ($'000) Cash / Expenditure Cash / (Cash+Inv) Home Nursing Foundation $3,485 $17,746 $3, % Singapore Children's Society $7,495 $17,046 $3, % Catholic Welfare Services $4,195 $9,704 $14, % YWCA $10,697 $2,535 $ % Lion Home For The Elderly $5,300 $7,409 $ % St Luke's Hospital $15,183 $11,388 $3, % Ren Ci Hospital $18,831 $28,302 $8, % MINDS $27,241 $17,680 $3, % Kwong Wai Shui Hospital $9,801 $23,776 $ % SATA $11,753 $5,809 $48, % NKF $80,266 $23,648 $212, % TOTAL $194,247 $165,043* $296, % 3 months cash reserve = 0.25 Slide 17 of 30

18 Slide 18 of 30 Prudent Man Rule The fundamental principle for professional money management, stated by Judge Samuel Putnum in 1830: "Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income." The Prudent Man Rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested". Is this Applicable to Trustees of Charities?

19 Slide 19 of 30 Prudent Man Rule Should trustees of charity be held responsible: Charities with land that has been laid vacant and undeveloped for many years? Charities that put all its money in current account? Charities that rent out its premises below market value without a due process of evaluation? Charities that decide to put all its money in fixed deposits? US Case : Thomas Lynch vs John M Redfield Foundation (1970)

20 Slide 20 of 30 Flowchart Process in Investment for Charity Form the Investment/ Finance Committee Composition? financial skills committed team players Things to do? Formulate IPS Investment horizon Risk and return assessment Things to do? Monitor progress Evaluate conduit or investment changes Establish the financial budgets/needs Things to consider? Financial needs for operations Cash available for Establish investment investment goals and expectations Obtain investment vehicle Periodic Report & Assessment Things to do? Investment conduit Types of investment Engaging stakeholders

21 Slide 21 of The Investment/ Finance Committee Composition : experienced, financial skills, committed team players The IFC shall be appointed by the Board and may include non-members of the Board. The Chairman shall be appointed by the Board shall be a Board member. The IFC shall comprise of at least three Members, the majority of which including the Chairman shall be Board Members. A member who wishes to retire or resign from the IFC shall notify the Board in writing giving three (3) months notice or such shorter notice as may be agreed by the Board. A member shall automatically cease to be a member of the IFC if he is removed/disqualified under the rules of the Companies Act, Cap 50 (the Act ), or if he resigns/retires/not re-elected as a Council member. If a member resigns, dies or for any other reason ceases to be a member with the result that the number of members is reduced to below 3, the Board shall, within 3 months of that event, appoint such number of new members as may be required to make up the minimum of 3 members.

22 Slide 22 of The Investment/ Finance Committee 1. MISSION/OBJECTIVES The Investment and Finance Committee (IFC) shall assist the Board in fulfilling the Board s responsibilities for financial reporting, risk management, cash management and investment matters. 2. AUTHORITY The IFC shall have the authority to investigate any matter within its terms of reference; full access to and co-operation by management; full discretion to invite any director or executive officer to attend its meetings; and reasonable internal and external resources to enable it to discharge its functions effectively. The IFC being a committee of the Board shall conform to any regulations which may be from time to time imposed by the Board.

23 Investment/ Finance Committee DUTIES AND RESPONSIBILITIES Craft the investment policy statement of the charity. Review and recommend terms of appointment of fund manager(s) and allocation of quantum of funds as applicable. Maintain overview of the performance of the appointed fund manager s) to ensure consistency with market conditions and expectations. Consider and approve recommendation by the fund manager(s) of financial instruments and set appropriate boundaries for investment of said instruments. Evaluate significant capital investment proposals to be approved by Board Recommend annual budget for the Board s approval and review monthly financial report. Monitor and ensure that the charity maintains sufficient level of operating reserves to ensure long-term financial sustainability, and that the reserves are not built up into excessive amounts. Review and set financial approval limits of CEO and managers. Review the AR position. Slide 23 of 30

24 Slide 24 of Establish the Budgets/Needs/Investible Reserve Formalise cash budget of the operations of the charity; Compute the investible reserve of the charity; Determine the duration of the investible reserve; Establish target returns and financial needs of the charity; Consider the stakeholders of the charity; Consider the mission and vision of the charity; Consider investment strategy and vehicle.

25 Slide 25 of Establish Investment Goals and Expectations Formulate Investment Policy Statement (IPS) Determine the investment horizon Determine the risk appetite of the Charity and its stakeholders; Assess the risk and return assessment; Consider the choice and vehicle of investment; Consider the Internal competency and availability of the management staff to monitor the investment.

26 Slide 26 of Establish Investment Goals and Expectations Example: Obtaining Authority and Formulating the Process Set returns benchmark and risk Get clearance from the board In-house or out-source decision Need between 4 to 8% of annual returns to support operating deficit ($2m to $4m). Begin process to invite potential vendors.

27 Slide 27 of Obtain Investment Vehicle Investment manager Types of investment (risk and returns) Engaging and educating stakeholders Risk Types Riskless Low Risk High Risk Instruments Government T-Bills / Bonds Fixed Deposits (Types of Bank) Corporate Bonds Stock Indexed Funds Sector/Country Specific Funds Specific Equities / Real Properties Junk Bonds Hedge Funds Fund Manager; Finance Committee Direct Investment Passive investment through the banks or management.

28 4. Obtain Investment Vehicle Select Fund Manager Calling for vendors (beauty contest) Presentation and interview Shortlisting & selection of vendor Specialised team (reduced turnover) Investment Policy Statement Investment objectives (X% pa over 3 years horizon) Equities : 30-40% Fixed Income 60-70% Constraints - Primary investment in Singapore Fees Base Fee: % of Portfolio Value Performance Fee : Participation in excess returns. Endorsement by Board 2007 Ho Yew Kee, PhD, FCPA, CFA Slide 28 of 30

29 Slide 29 of Periodic Report & Assessment Monitor progress; Evaluate conduit or investment environment; Evaluate the changing needs of the charity; Explore other investment opportunities; Re-assess the horizon and investible quantum. Example Detailed monthly reports to Committee members with returns metric Quarterly review & presentation Report to the Board Evaluation for contract renewal

30 Slide 30 of 30 Conclusion Having good people on the management and Board is most critical!! No-Money, No-Mission is a dominant principle in NPO. Knowing what is your cash flow is a key financial management concept. Managing the reserve well will ensure the NPO will go a long way.