THE INTERNATIONAL MANAGEMENT DEVELOPMENT PROGRAMME速 (IMDP)
THE HEALTH MANAGER ISSUE 5, 2014
IN THIS ISSUE ON
BUDGET AND FINANCIAL RISK MANAGEMENT RETHINKING OVERHEAD AS A MEASURE OF EFFECTIVENESS EXECUTIVE PERSPECTIVE: PRABODH BHAMBAL DEPUTY EXECUTIVE DIRECTOR, THE UNION PLANNED FLEXIBILITY: LINKING ANTICIPATION AND REACTION IN FINANCIAL RISK MANAGEMENT
International Union Against Tuberculosis and Lung Disease Health solutions for the poor
union-imdp.org
WELCOME TO
The Health Manager ISSUE 5, 2014 BUDGET AND FINANCIAL RISK MANAGEMENT Dear Reader, Most of the public health organisations greatly depend on donor funds and, as a consequence, must have strong budgeting and financial management processes in place. As part of operational activities, financial risk management system should also exist to anticipate and mitigate any potential internal and external threats to these funds. In this issue of The Health Manager, we share the valuable insights from executive perspective with Prabodh Bhambal, The Union's Deputy Executive Director. We also discover ways projects and programmes can be measured using the 'overhead' analysis. And finally, we conclude with specific tools and questions one can apply to begin addressing financial risk management. To learn more, visit www.union-imdp.org for The Union's IMDP course on Budget and Financial Risk Management.
JosĂŠ Luis Castro Executive Director The Union International Union Against Tuberculosis and Lung Disease Health solutions for the poor
INSIDE THIS ISSUE Executive Perspective: Prabodh Bhambal . . . . . . . . . . 4 Rethinking Overhead as a Measure of Effectiveness . . . 10 Planned Flexibility: Linking Anticipation and Reaction in Financial Risk Management . . . . . . . . . . 16
The Health Manager is published by The Union’s International Management Development Programme (IMDP). Director of Publications: José Luis Castro, Marketing and Business Development Manager: Stephan Rabimov. © 2014 The Union.
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EXECUTIVE PERSPECTIVE: PRABODH BHAMBAL
DEPUTY EXECUTIVE DIRECTOR, THE UNION
Behind most successful public health programmes is a solid structure for sound fiscal management and controls. But even experienced, proficient financial executives and programme leaders can get tripped up by surprises. Financial risks can arise from inefficient use of resources, unexpected loss or delayed release of a grant, chronic deficits or severe currency exchange rate swings. 4
Photo: Courtesy of Prabodh Bhambal
Prabodh Bhambal, Deputy Executive Director and Chief Financial Officer of The Union, has helped numerous national programmes respond smartly to the twists and turns of financial uncertainty. He shared his thoughts on financial risk management with The Health Manager. The greatest financial risk that programmes face, as most leaders can attest, is the uncertainty of funding. Projects end; donor priorities shift; the primary advocate for your programme can leave the funding organisation. The best insurance against funding loss, Bhambal says, is to develop – and demonstrate to funders – a tight, strong network of partner organisations. “Donors like to see partnerships,” he says. “It strengthens your negotiating position – it indicates that your programme is broad based and well supported.” Increasingly, Bhambal notes, funders evaluate management and financial performance, as well as operational performance. Programme managers that think the good work they do in the field can paper over any deficiencies in fiscal management are deceiving themselves in this era of fiscal accountability. Build donor confidence, he advises, by transparently demonstrating the soundness of your financial management system. Demonstrating credibility, through solid fiscal management, starts with realistic, accurate budgeting. A robust expenditure feedback 5
and forecasting mechanism should be in place as well to enable mid-course corrections. Bhambal recounts the time he and his team used a forecasting tool to foresee an unexpected spending uptick – and convinced management to reduce costs in anticipation of it. Financial risk from currency exchange rate fluctuations can upset the most carefully planned budgets and are wholly unpredictable. Many nonprofits are inexperienced and unprepared to cope with this. Organisations that work in multiple countries can mitigate this risk by creating independent entities in-country. This allows funds to flow directly to the recipient country, rather than routing grants via headquarters. This also eliminates the need for headquarters to report on exchange fluctuations in their financial statements. What about organisations working in one country? They can enter into currency futures contracts that mitigate, or hedge, risk. This is a specialised activity best handled by a financial institution with expertise, such as a bank. Beyond this, Bhambal says, “Chief financial officers can protect against budget surprises by maintaining strong fiscal control and feedback systems and building backup protections.” Financial officers live in fear of cash flow complications that result when donors unexpectedly delay release of funds. One way to 6
counter this is to obtain a line of credit from a financial institution. Unfortunately, many banks are unfamiliar with the nonprofit organisation’s business model, and reluctant to grant credit. To alle-
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CHIEF FINANCIAL OFFICERS CAN PROTECT AGAINST BUDGET SURPRISES BY MAINTAINING STRONG FISCAL CONTROL AND FEEDBACK SYSTEMS AND BUILDING BACKUP PROTECTIONS. viate this concern, Bhambal advises, “build a healthy balance sheet with a corpus or create a reserve fund or strong asset base.” This may be ownership of a property, perhaps the headquarters itself. 7
It is also important to maintain close communication between programme staff and the finance team. Bhambal recalls countless situations where programme staff submitted proposals without consulting the financial team, or finance staff crunched the numbers for a grant renewal without conferring with the team in the field. Simply “plugging in” a number for last year’s costs plus inflation can fail to reveal special circumstances that only the field team is aware of. Bhambal advises: “Don’t talk only when it’s budget time; talk year-round.” Perhaps the most fundamental strategy for fiscal risk management is having “a robust budgeting process,” says Bhambal: “Budgeting is planning: if you budget and plan well, you are moving in the right direction operationally.” Finally, he adds, technology is the great enabler. “Use it to create a disciplined and structured system with simple processes. This will go a long way in anticipating and managing financial risk.”
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STRATEGIC PLANNING AND INNOVATION 2014 COURSE July 14 – 18, 2014 • Kuala Lumpur, Malaysia • Register at union-imdp.org REGISTRATION DEADLINE: JUNE 15th, 2014 PROGRAMME AGENDA This five day course focuses on creating learning organizations capable of identifying key issues that may be blocking organisational progress – whether operational, strategic or policy-related. Participants in this course will develop new insights into how to analyse situations, question conventional approaches, encourage new ideas and innovations and design and implement interventions that stimulate programme progress and positive outcomes. Strategic Planning and Innovation emphasises individual and group strategic thinking that leads to innovating applications and results in continuous quality improvement. BENEFITS OF TRAINING 1) Lead participatory approaches to strategic planning 2) Create innovative strategies that provide a framework for future action 3) Prepare a collaborative strategic plan 4) Develop relationships with parties that influence the decision-making process 5) Improve decision-making skills when strategies fail or do not progress 6) Experiment with strategy implementation applications WHO SHOULD ATTEND Middle- to senior- level managers working in public health, as well as managers who oversee personnel across multiple levels, divisions and locations. Strategic organisational leaders, decision makers and thought leaders who are responsible for the formulation of organisational or programme strategy and who lead organisations at regional, national and international levels may also benefit. DATE
LOCATION
FACULTY
LEVEL
FEE
LANGUAGE
July 14 – 18, 2014
Kuala Lumpur, Malaysia
Viswanath Golpalkrishnan and Gayatri Sriram
Middle- to seniorlevel professionals
Euro 1,500 Course fee includes accommodation, breakfast, lunch, tea breaks, and course materials
English
Application deadline is 45 days prior to course. Upon acceptance into course, applicants will be invoiced. Fee payment is due within 30 days of invoicing.
Contact IMDP: imdp@theunion.org
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RETHINKING OVERHEAD AS A MEASURE OF EFFECTIVENESS FRANK G. COLELLA IMDP FACULTY
How should the effectiveness of a not-for-profit organisation be measured? An outcome-based model – for example,one that looks at how well an organisation performs its mission – would be a good choice. However, outcome-based metrics are rarely available. Or, if available, they are not generally standardised metrics that provide comparison to other similarly based organisations or industries.
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Photo: Courtesy of Frank G. Colella
Therefore, donors and stakeholders have traditionally looked to “overhead ratios” – the percentage of an organisation’s budget that is spent on non-programme-related activities. The smaller this ratio (the less spent on overhead), the more an organisation spends on programme services – in the actual performance of its mission. Fairly or not, under this model, the organisation that spends more on non-programme costs is viewed as less effective than a similar organisation that spends less on overhead. While the overhead percentage metric has been employed by stakeholders and donors for decades, the question of whether it can yield a meaningful measurement of an organisation’s effectiveness is being reconsidered. Last summer an open letter signed by three prominent organisations that evaluate nonprofit effectiveness – GuideStar, Charity Navigator and BBB Wise Giving Alliance– sought to end the misperceptions of the “overhead myth” – that spending less on overhead results in more resources for programme services, therefore leading to the organisation more effectively achieving its mission. The alternate view suggests thatnot only isn’t the overhead ratio a meaningful metric, but also the continued drive to reduce the overhead ratio leads, in turn, to a vicious cycle of “starvation” that, in the long run, reduces an organisation’s overall effectiveness because it is continually deprived of resources.
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In other words, the percentage of an organisation’s budget that is spent on overhead may not be the best metric of effectiveness when those overhead resources are invested in building the organisation’s critical infrastructure. Some examples of “good” overhead include resources devoted to technology – both hardware and software; internal and external communications, marketing and branding
WHETHER AN ORGANISATION’S SPENDING ON ADMINISTRATIVE COSTS AND FUNDRAISING (THE TWO MAIN BRANCHES THAT TYPICALLY MAKE UP WHAT IS REFERRED TO AS OVERHEAD) IS ACCEPTABLE MUST BE VIEWED IN THE CONTEXT OF DONOR/STAKEHOLDER EXPECTATIONS. 12
Photo: Courtesy of Frank G. Colella
of the organisation’s products and services; research and development costs; fundraising and donor development programmes; human capital management (both recruitment and retention); and, strategic planning initiatives to map out the organisation’s future plans. A metric focused on the percentage of resources allocated to overhead expense standing alone as an absolute number isn’t helpful if it doesn’t also examine the composition of the overhead costs – what’s behind the number. Whether an organisation’s spending on administrative costs and fundraising (the two main branches that typically make up what is referred to as overhead) is acceptable must be viewed in the context of donor/stakeholder expectations. This is essentially an education (or reeducation) process that requires a realistic appraisal of the costs needed to build the organisation and have it ready to perform the assigned mission. In some circumstances it may be necessary or desirable for donors to fund specific overhead components – such as underwriting the cost of installing updated technology that will ultimately benefit multiple programmes. While budgets must include overhead allocations – organisations that seek to keep the overhead ratio low (and thus appear more “effective”) may be tempted to downplay – or even ignore – the need to update technology. Instead, those organisations might seek to “make-do” with the older technology – bypassing the opportunity 13
to update and modernise the infrastructure. While it’s admirable in certain situations to “make-do” with available resources in the short run, the organisation may require the investment to support its long-term effectiveness – or risk becoming marginalised when it can’t undertake future programmes due to inadequate technology. Ultimately, to break the overhead myth and end the starvation cycle, expectations must be rethought. This can only be accomplished with greater organisational transparency – providing meaningful cost estimates of administrative expenses and fundraising and, in turn, communicating those figures to the stakeholders and donors. The stakeholders and donors, in turn, must recognise that to effectively provide programme services, the organisation must invest in and develop its infrastructure. When both sides are in accord with the budget, the effectiveness of the programmes should then be measured with outcome-based metrics – designed and agreed upon in advance– a process similar to the development of the budget itself.
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BUDGET AND FINANCIAL RISK MANAGEMENT 2014 COURSE August 4 – 8, 2014 • Kuala Lumpur, Malaysia • Register at union-imdp.org REGISTRATION DEADLINE: JUNE 30th, 2014 PROGRAMME AGENDA The objective of this course is to provide participants with advanced knowledge of budgeting and financial management processes, including key principals of the Global Fund’s Operation Risk Management framework (ORM). Participants will receive training in developing and managing financial reporting systems to apply in their work at local, national and/or international health programmes. The course will cover budget planning, implementation, monitoring, financial/operation risk management and reporting. BENEFITS OF TRAINING 1) Explain the uses and functions of budgeting and financial management 2) Identify and practice effective financial/operation risk management techniques 3) Design, develop and present programme budgets using Excel 4) Create and use a cash flow budget 5) Perform a workload analysis 6) Identify and practice effective revenue and expenditure estimating techniques 7) Review an operating budget using variance analysis
WHO SHOULD ATTEND Middle- to senior- level health managers who are responsible for programme administration in health organisa- tions, as well as doctors, administrators and consultants who manage project budgets.
DATE
LOCATION
FACULTY
LEVEL
August 4 – 8, 2014
Kuala Lumpur, Malaysia
Frank Colella and Salil Kumar
Middle- to Seniorlevel professionals
FEE
LANGUAGE
Euro 1,500 English Course fee includes accommodation, breakfast, lunch, tea breaks, and course materials Application deadline is 45 days prior to course. Upon acceptance into course, applicants will be invoiced. Fee payment is due within 30 days of invoicing.
Contact IMDP: imdp@theunion.org
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PLANNED FLEXIBILITY: LINKING ANTICIPATION AND REACTION IN FINANCIAL RISK MANAGEMENT MILLI CHOWFLA
VICE PRESIDENT FINANCE AND ADMINISTRATION, THE UNION, NORTH AMERICA
Financial Risk Management (FRM) Today’s global economy and dynamic, fast-paced world create an environment where , every organisation – whether for-profit or not-for-profit – is under constant risk to its stability and longevity. From maintaining and diversifying continuous funding to monitoring the integrity of programme outcomes and ensuring client safety, managing a range of risks is required for both survival and success. A dynamic approach is needed to cope with these risks in a timely manner. As a result financial risk management (FRM) has gained a lot of attention. FRM has become equally important to not-forprofits as it is to for-profit and governmental organisations. 16
Photo: Courtesy of Milli Chowfla
The objective of this article is to understand FRM with respect to not-for-profit organisation’s environment. We will focus on three important questions:
1. What are the risks
2. How to manage these risks
3. Procedures/tools to manage risk
What are the risks we are talking about? In simple language, these are the risks that have a negative impact on the financial aspect of an organisation. For example: 1. Funding: The most important question for any organisation is what is the source of its funding. For not-for-profits, having a single donor is very risky. During difficult economic times, such as recession or due to competition or other reasons, the funding support from donor may either decrease or simply be cut and contingency plans should be in place. 2. Weak Internal Controls: Having weak internal controls leads to the risk of fraud, which cannot only leads to financial losses but also loss of standing and reputation. This in turn may not only cause existing donors to reduce or cut funding support but also make it difficult to find new donors. 3. Compliance: Many organisations are not in compliance with the legal requirements of the country, state and/or township 17
where they operate. Lack of compliance can have devastating effect on the organisation. 4. Scope of Activities/Mission: This takes us back to the word “competition�. There is always the risk of losing funding due to other organisations implementing similar activities or due to a change in a donor’s priorities and mission. How to manage these risks? Organisations have different risks depending on their size, structure and other factors. However, the following simple cycle can be adapted by any organisation to successfully manage their risks. SWOT Analysis: Strengths, Weaknesses, Opportunities and Threats
Monitor/examine implemented approach
Implement the risk management approach
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Recognise your risks
Identify your approcah to manage risk
The first step in this cycle is to do a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), which can be used to identify the risks faced by your organisation. Next, identify the most effective approach for managing these risks, and then implement the risk management approach you have identified.
THE SUCCESS OF A RISK MANAGEMENT PROCESS LIES IN THE 'IMPLEMENTATION' STAGE. SIMPLY ANALYSING AND RECOGNISING RISKS DOES NOT HELP; IMPLEMENTATION AND EXECUTION OF THESE PROCEDURES ARE CRUCIAL TO MANAGE FINANCIAL RISKS IN AN EFFECTIVE MANNER.
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The success of a risk management process lies in the “Implementation” stage. Simply analysing and recognising risks does not help; implementation and execution of these procedures are crucial to manage financial risks in an effective manner. Once a risk management strategy has been implemented, constant monitoring and audit of these procedures is important. This cycle should be repeated frequently to ensure the organisation can successfully cope with the current dynamic environment. 19
What procedures can be adopted to manage risks? There is one imperative procedure that should be adopted by all organisations:
Form a committee that can constantly monitor risks and suggest strategies to prevent or manage risks. This committee should be responsible for ensuring that an organisation is not exposed to financial risks. Members of this committee must ensure that their organisation:
•
Has strong internal controls in order to reduce or remove the risk of fraud within an organisation
•
Recognise new areas of operation/diversification: There needs to be moderation in selecting the number of activities and the kinds of activities an organisation can implement successfully. There should also be a plan in place for diversification, if needed.
• Stay in compliance: Organisations should know and respect all laws and regulations that pertain to them and their operations. Non-compliance may result in licenses being revoked and fines being levied leading to financial losses. Lack of compliance is primarily due to inadequate knowledge and inability to cope with revisions in the laws and regulations.
Finally, as an example I would like to share a true incident that shows the importance of compliance and internal controls and how FRM can help. An organisation working very well on the
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ground was successful in helping many people with regard to their mission and activities. After a few years of seemingly successful work, they were subject to an audit by their donor. During the audit, it was discovered that the organisation did not have any legal presence in the country due to non- compliance with local laws and regulations. Here, lack of compliance was due to lack of internal controls and audit and adequate staff to handle compliance. Only one person was handling all aspects of the operations, leaving the organization susceptible to oversight with regards to potential risks. Having an FRM policy and procedure in place would have saved this organisation from closure. As this final example brings to light, the necessity and importance of FRM cannot be overstated. Regardless of size, mission or resources, each organisation should prioritise the analysis and management of risk susceptibility. The most common barrier to the implementation of risk management in not-for-profits and small businesses is perceived cost. As with any business decision, the benefits should outweigh the cost of such an implementation.
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TB ADVOCACY PROGRAMME DESIGN WORKSHOP September 22 – 26, 2014
•
Kuala Lumpur, Malaysia
•
Register at union-imdp.org
REGISTRATION DEADLINE: AUGUST 7th, 2014 PROGRAMME AGENDA Public health, specifically TB, advocates and patient organizations are vital forces for raising awareness of TB, among both the communities at highest risk of developing the illness and the organisations that work with them. The Union’s International Management Development Programme (IMDP) is organizing a capacity building workshop for TB advocates and patient organizations in the Region. This five day workshop will be held 22 – 26 September 2014 in Melia Hotel, Kuala Lumpur, Malaysia at which participants will: • Obtain current TB situation update (1 day) • Acquire the necessary advocacy and communication skills (2.5 days) • Understand the basic programme planning and budgeting (1.5 days)
BENEFITS OF TRAINING
WHO SHOULD ATTEND
• Communicate TB related messages more effectively
• Representative of a patient organization working on TB for more than 1 year or
• Advocate for TB programme improvement
• Individual with TB advocacy experience at the national or sub-national level for 1 year or
• Mobilize community for TB and other health related interventions
• CCM representative for key affected population with TB related experience
• Plan, budget and implement patient support programmes for TB patients
DATE
LOCATION
FACULTY
FEE
LANGUAGE
September 22–26, 2014 Modified for TB advocates & patient organisations, but appropriate for all public health advocates.
Kuala Lumpur, Malaysia
Tahir Turk, Cornelia Hennig, and Salil Kumar
Euro 1,500 Course fee includes accommodation, breakfast, lunch, tea breaks and course materials.
English Basic working knowledge of English will be necessary; however, the course is designed keeping in mind that English is not the main language of participants.
UPON ACCEPTANCE INTO COURSE, APPLICANTS WILL BE INVOICED / FEE PAYMENT IS DUE WITHIN 30 DAYS OF INVOICING
http://www.union-imdp.org/courses/tb-advocacy-programme-design-workshop 22
Contact IMDP: imdp@theunion.org
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THE INTERNATIONAL MANAGEMENT DEVELOPMENT PROGRAMME庐 (IMDP)
THE HEALTH MANAGER ISSUE 5, 2014
The Union, North America 61 Broadway, Suite 1720 路 10006 New York, NY, USA Tel: (+1) 212 500 5736 路 Fax: (+1) 347 772 3033 email: imdp@theunion.org 路 www.union-imdp.org
International Union Against Tuberculosis and Lung Disease Health solutions for the poor
union-imdp.org