2002 UK

Guide to Financial Management

2002 UK

Case study - 2002 UK

Reliance on restricted funds and poor governance

Background – activities

Childhood Development & Aid (CDA) (NB not its real name) was founded in the UK in 1990. In 2001, it employed over 500 members of staff, and ran varied humanitarian projects in 10 countries including:

  • recreation and rehabilitation work with children in urban communities (Macedonia)
  • training health workers and supporting health centres (Albania, Burundi and Liberia)
  • providing safe water in nursery schools (North Korea)
  • providing reproductive health information (Azerbaijan)
  • nutritional support for children and pregnant mothers (Tajikistan, Burundi and Haiti)
  • supporting de-mobilised child soldiers and farmers (Sierra Leone)

Background - finances

All figures in GBP ‘000


1997 1998 1999 2000 2001
Income & Expenditure          
Total income 7,161 8,790 16,712 13,500 6,958
Total expenditure  8,345 8,940 15,353 13,905 8,470
Total surplus/(loss) (1,184) (150) 1,359 (405) (1,512)
Reserves          
Restricted funds 992 895 2,133 1,814 520
Designated funds* 189 145 122 59 109
General funds (450) (459) (315) (338) (606)
Total funds  731 581  1,940   1,535 23

 
  *Designated funds were held in fixed assets.

In 2001, income was from 15 institutional donors funding a wide variety of project activities.

At 30 Sep 2001, CDA owed £2.2m, including an overdraft of nearly £1m.

Problems apparent in the figures:

  • General reserves were negative for five years
  • Total reserves dwindled to £23,000 – which was just 0.3% of total expenditure in 2001.
  • The organisation relied on restricted grants – which meant that income fluctuated a great deal (falling by almost 50% between 2000 and 2001). This would make it hard to cover core costs, or build up reserves. It is no coincidence that general reserves fell further into the red at the same time as overall income fell, from 1999 to 2001.
  • It is not clear how the organisation expected to pay off its large overdraft.
  • Projects were very varied. This means that the organisation may have struggled to build up expertise and learn effectively from its work.

Background – culture

  • There was a culture of secrecy, eg all minutes of Board meetings were kept confidential
  • The Board did not challenge management, and did not know about the issues facing staff
  • Board members were genuinely shocked to discover the size of the creditors list in early 2002
  • The mission statement was not owned and the vision was not shared by all staff
  • Staff from the different departments in head office rarely spoke to each other, and there were internal barriers between departments.

What happened?

  • CDA’s founder left the organisation in Aug 2001 after 11 years.
  • The Chairman of the Board and the Executive Director stepped down around the same time
  • In 2000 they suffered a large exchange rate loss
  • In April 2002, the charity told all its employees that it was in a dire situation
  • In May 2002, CDA entered into a ‘company voluntary agreement’ with its creditors. This is a legal process in the UK, which meant that CDA’s creditors agreed not to take legal action if CDA took steps to recover and repay as much as they could.
  • Between May and August 2002, all CDA’s programmes were wound down or passed over to other NGOs, all their staff made redundant and all their assets sold.
  • In August 2002, the organisation ceased to exist.

On reflection, some staff felt that “too much emphasis had been placed on fulfilling all of the projects proposed by the programmes department, and not enough time spent on adapting to the realities of fundraising capacity and to general financial disciplines.”

Key lessons learnt

  • It is important that vision and mission are shared and owned
  • A lack of transparency at the most senior levels makes good governance difficult
  • The Board need to be aware of what is happening ‘on the ground’ and challenge management
  • The Board need to review financial information critically
  • Over reliance on restricted funds can result in difficulties financing core costs
  • Stick to the general financial discipline of managing your costs to live within your means