financial management

financial management

  • Naidoo Faces Damaging Scandal

    Greenpeace head, Kumi Naidoo, is facing a series of damaging scandals at the global environmental watchdog, according to a newspaper report.

    And to make matters worse the human rights activist, who is the executive director of the Greenpeace, a non-governmental organisation with a budget of R4-billion, is mourning the loss of his father in South Africa.

    The “rainbow warriors” have had a bruising fortnight, shaken by incidents that have angered supporters, including the unmasking of an employee who lost R55 million of funds in a foreign currency exchange bungle, among others.

    To read the article titled, “Greenpeace boss faces damaging scandal as he mourns his father,” click here.

    Source: 
    Times Live
  • 2014 - Financially Astute?

    The CMDS - a registered practice with the South African Institute of Chartered Accountants which acts as accounting officers for organisations that choose not to have an independent audit - believes that 2014 is a year for leaders of nonprofit organisations (NPO) to become more financially alert and astute and so be more aware of financial dangers and pitfalls as well as new opportunities for broadening income streams and building financial sustainability.

    In these unpredictable times in the sector, it is only the organisations that have implemented good strategies for financial sustainability that will successfully ride the storms ahead. Consequently, CMDS plans to, once again, offer workshops on financial sustainability in 2014. In addition to the usual one-day workshop introducing strategies for financial sustainability, CDMS is planning an advanced workshop at which it will focus particularly on possible ‘business models’ for NPOs that focus on income generation through the provision of services, trading and investment. This workshop will consider some of the dangers and pitfalls associated with such models, as well as the opportunities.

    The CDMS will also try to ensure that NPOs are updated, through its news and the website, with the constantly changing issues related to employees' tax and the South African Revenue Services (SARS). The Employment Tax Incentive Act is one recent development which presents some opportunities for NPOs (as employers). CMDS also plans to offer information sessions related to payroll and to some of the dangers and pitfalls relating to SARS and the law. The failure to pay over Pay As You Earn (PAYE) and other taxes to SARS results in steep penalties and interest and has already caused many organisations to close its doors. Be aware, be astute - pay SARS first!

    Another issue that has tripped up some organisations has been their extensive use of cash to make payments (because they thought the use of large amounts of cash was unavoidable or enabled them to save money). The dangers and pitfalls of using cash to make payments are significant so CMDS intends, in the second half of the year, to offer its one day workshop on this topic, entitled ‘Cash and Accountability’. In dealing with cash, as with all areas of financial management, there is a cost to implementing effective control - financially astute NPO leaders need to weigh up this cost against the risks and benefits of increased control.

    Aside from these open, ‘public’ workshops, CMDS is also available to facilitate and run workshops specifically to any organisation or a group of organisations - some topics that have proved particularly popular with, and helpful for, NPOs include:
    • Financial management for project managers;
    • Risk assessment and management for NPO boards;
    • Activity-based budgeting;
    • Effective cash flow management; and
    • Understanding NPO financial reports.
    Contact CMDS if you are interested in any of these workshops.

    The open training schedule for 2014 will be finalised and available by the end of January, giving NPOs the opportunity to consider which areas of capacity development could benefit them.

    We wish you every success in 2014.

    For more information, email: cmds@cmds.org.za.

    For more about the CMDS, refer to www.cmds.org.za.

  • Building Financial Sustainability in Development Organisations: You Can Do It!

    When I was running an Apex non-governmental organisation (NGO) in the mid-1990s, our members were keen to learn how to become financially sustainable.  The mid-1990s was an exciting time in South Africa; but also challenging for NGOs. Donors were directing their money to the new government, leaving many NGOs, including mine, to figure out how they were going to survive. I was fortunate to meet Bill le Clair of the Institute for Development Research who invited me to attend a course on building sustainability; and later came to South Africa to work with us.
     
    The course and Bill’s guidance showed me we could have a future with declining dependence on donor funding. I shared my learning with the staff and Board; and together we set out to define our sustainability strategy. The staff bought into this new approach because they saw that it would enhance their work; and there were incentives to generate income. My Board saw the long-term advantages of a strategy that diversified our sources of revenue. The core of our strategy was that, paid up members received a set of services which included a regular newsletter, information on best practices, policy and regulatory advocacy and participation in the annual conference. Then we provided specialised, accredited courses, information searches, published sectoral information and professional advisory services for fees which was paid for by members and external agents.  Of course, some members complained about paying for accredited courses. We emphasised we were delivering training that complied with international best practice; and their organisations were performing better as a result. 
     
    Another key area of support was that our donors liked the idea and supported our strategy. I realised along the way that existing donors are partners and feel that their grant becomes an ‘investment’ destined for long-term impact when the organisation has a sustainability strategy. Once I had it all written up and our financial statements reflected our sustainability ratios, I showed it to prospective donors who were seriously impressed. Within three years, the team and I managed to generate 53 percent of our annual income from services, courses and fees delivered to members and external buyers.
     
    In recent years, I have applied this experience in a number of programmes where I have worked, and have built a comprehensive suite of support services and materials for organisations that wish to build sustainability. My experience has taught me that a phased approach is needed, so organisations can ease their way into new ways of thinking and working while still maintaining focus on their mission.  One of the very first things I encourage people to recognise is that ‘building’ sustainability is just that!  It is not a one off event that will take you from total dependence to independence from donors.  It is a process that needs to be well-thought through and carefully managed. Organisations will need to continue to deliver their existing programmes while diversifying their sources of income.
     
    While increasing income internally and declining donor dependence may be the most obvious benefits of building financial sustainability, there are others which include:
    • Organisations have greater freedom and independence in deciding on their strategies and activities when they generate their own resources;
    • In the process of building sustainability strategies, organisations need to examine their operations and procedures which leads to internal strengthening, enhanced management and team building;
    • When an organisation has a clear sustainability strategy and a record of generating internal income, these improve the image of the organisation in the eyes of potential and existing donors and can attract more external funding;
    • The relationship with partners in development programmes also benefits as organisations that generate internal income are more likely to negotiate on the basis of exchange rather than as benefactor and recipient.
    Taking the first step – understanding your organisation
     
    In order to start on this transition, organisations need to be strong enough to manage change. I use a sustainability assessment tool that enables organisations to gauge their readiness and support them in this analysis. The tool takes an organisation through a detailed examination of its current efficiency and performance across all its activities and management processes. It is important to conduct the assessment as an organisation wide process, with everyone – staff, management and board – fully involved; rather than a Director/MD/CEO conducting the assessment in isolation. In this way, the whole team builds consensus on strengths and areas for learning and strengthening.  I also focus on helping the teams to recognise the difference between practices that maintain and ones which sustain an organisation. Often good practices are in place; however, with more understanding of sustainability, organisations can readily enhance their practices and performance. The sustainability assessment may reveal that an organisation is ready to implement a sustainability strategy or there may be areas where strengthening or additional capacity may be required and the entire organisation needs to come together and jointly agree on the optimal ways to move forward.
     
    Getting the organisation ready for sustainability
     
    An organisation may be able to implement the strengthening processes with little guidance; or more substantial support may be needed. I can provide this or we can jointly find the best provider or method to meet the organisation’s need. Again, it is vital the leadership and staff work together to build these organisational foundations and prepare as a team for the new journey.
     
    When the team feels ready, I provide case studies from around the world showing how different development organisations have achieved financial sustainability.  The case studies highlight a range of strategies and methods that have been used successfully. Some of the organisations featured in the case studies have been around and growing for over 40 years, which shows that sound strategies, can endure. A participant in a recent workshop in Ghana said: “I learnt it is possible to build a sustainable organisation even among the poorest people.” Some organisations that I have worked with believe sustainability can be achieved by finding donors who will assist in creating an endowment, the interest from which can sustain the organisation. Sadly, I have to say that in 29 years of working with and around donors, I have not come across any that have been willing to contribute to an NGO endowment fund.  Organisations can build endowments in other ways and these are good to explore when assessing revenue options.
     
    Planning for financial sustainability
     
    The next exciting stage is to start planning for financial sustainability. I have designed a highly participatory workshop, where organisations learn, plan and have fun! The workshop runs for three or four days, which gives people the time to try out new ideas, create plans and share them in the workshop. Peer relationships and support networks can be created, which organisations can continue and retain for shared learning after the workshop.
     
    The objectives of the workshop are to: create the opportunity for NGOs to plan their sustainability strategies; generate a supportive atmosphere where participants can share, learn and plan jointly; and build supportive relationships that allow organisations to compare learning and winning strategies as they work alongside each other (such relationships can cut through the isolation of managing new processes).
     
    The workshop introduces NGOs into new skill sets and ways of thinking and realising sustainability. Modules on change management, a model of social entrepreneurship, generating income, financial analysis, market planning, public relations and organisational reputation management bring new insights and tools to the participating organisations. Participants feel comfortable with the approach as the materials and tools are contextualised specifically for NGOs.  The feasibility of ideas for diversifying and generating income are tailored for NGOs. 
     
    I strongly recommend at least three people per organisation participate in the workshop.  This is to allow for a team to strategise back-home plans and enable team members to support each other in change management and implementation of the new strategies.
     
    Implementing the sustainability plan
     
    Following the workshop, I will work with organisations to develop and finalise your plans and assess them. Once finalised, we can decide any arrangements for technical support that will probably be needed.  This can be done in mixed teams from different organisations which promotes peer learning and makes it more economical for NGOs.
     
    Comments from organisations that I have worked with on sustainability include:
     
    “You answered so many questions in my mind.”
    “My ability to face and manage change was enhanced”
    “We realised that we had missed several opportunities for sustainability!”
    “The workshop and the process which followed was wonderful, timely, insightful and, useful!”
     
    - Sharda Naidoo (sharda@iafrica.com) is a senior economic development specialist who has worked on enterprise and financial sector development for more than 25 years.  
    Author(s): 
    Sharda Naidoo
  • Investing for the Future

    A well-managed reserve fund is a vital component of any organisation’s sustainability strategy. Reserves provide a safety net to carry organisations through the lean times but they also, crucially, offer the breathing space to enable meaningful collaboration, planning and growth so that organisations deliver the best, most transformative solutions to South Africa’s challenges.

    Alan Wellburn from Citadel Wealth Management explains.

    Public benefit organisations have a duty to be responsible stewards of public funding and trust – this means managing their finances wisely.

    Benefits

    A reserve is the balance of the previous years’ operating surplus - or unspent funds.  Some organisations set aside a specific percentage of their operating costs for a reserve each month or year.

    The benefits of a reserve include:
    • Protecting beneficiaries by making sure they receive services provided by the organisation, regardless of changes in funding cycles or funding delays;
    • Providing funders with assurance that the organisation has the capacity and financial health to make the best use of grants;
    • Creating a safety net to protect the organisation in unforeseen circumstances, such as a major funder pulling out suddenly;
    • Providing capital that can be used for future projects (e.g. building maintenance), borrowed against or used for the expansion of the organisation’s activities.
    Everyone in an organisation - from the trustees and directors through to fundraisers and programme managers - should support the building up of a reserve. A Reserve Policy should clearly define how the reserve should be invested and how and when it can be used.

    Myth-Busting

    Myth: Having a reserve discourages funders because they think the organisation has enough funding and is not as needy.

    Reality: Most major funders today prioritise the sustainability and impact of the organisations they support and prefer grantees to have a reserve. Many specifically look for organisations that have enough in reserve to cover at least three to six months’ operating costs.

    Sources of Funding

    Building up a reserve can be a challenge, particularly in tough economic times. Some funders would rather support beneficiaries directly than contribute to a reserve fund.

    But there are other ways to build a reserve:
    Operate at a small surplus each year and invest any of the surplus, rather than spend it in the following year. Although this requires a level of financial discipline, it is a strategy that pays dividends in the future.
    Unrestricted funding such as legacies, bequests, individual giving and self-generated income are also good sources of funds for a reserve.
    Investment income (interest or dividends) generated by investing larger grants until the funds are needed for project implementation is also a great source of reserve funding.

    Myth Busting

    Myth: It is more responsible to keep funds in the bank, rather than to risk it in an investment vehicle.

    Reality: Funding not being used for immediate operating expenses that is kept in a bank account is losing value over time because the interest rate does not keep up with inflation - this is called inflationary risk. But investing in the stock market can also be a risk because value can fluctuate rapidly in the short term (volatility risk). An experienced investment house will be able to select an investment strategy that takes into account both of these risks so that surplus funds will grow over time and stay ahead of inflation.

    Investing Reserve Funds

    The directors or trustees of public benefit organisations have a fiduciary responsibility to ensure that reserves are invested wisely. An investment approach which takes into account both inflationary risk and volatility risk is essential. The examples below show how investment decisions can make a major difference to the size of a reserve over time.

    Two organisations have R10 million in reserves and choose to invest it differently.

    In the Bank:

    Organisation A chooses an interest-bearing bank account. The interest on the R10 million (four percent) in an inflationary environment like South Africa, is less than inflation at six percent. After 25 years, this reserve is only worth R6m in real terms. In other words, the purchasing power of the R10m reserve will be eroded by inflation and will be reduced to R6m, despite the interest earned.

    Modelling assumptions: Inflation rate: six percent; Interest rate at bank:  four percent

    Diversified Portfolio:

    Organisation B chooses a diversified, prudent investment portfolio. The return over a 25 year period is more, at nine percent, than the inflation rate of six percent. Based on a projection rate of three percent in excess of inflation, the value of their R10m reserve increases to R20m in real terms.

    Modelling assumptions: Inflation rate: six percent; Projection rate: three percent in excess of inflation (nine percent nominal)

    Managing a Reserve

    It is important to get advice from a reputable wealth management company with the knowledge and expertise to implement the best investment solution for an organisation.

    Cash-flow modelling is used to make sure an organisation has access to its capital if needed (short-term liquidity) as well as long-term growth (to stay ahead of inflation). Knowing what cash will be needed and when, the two major portfolio risks of inflation and volatility can be managed over time.

    This is achieved by allocating the reserve fund to three broad risk categories or portfolios:

    The Stable Portfolio - This is the part of the organisation’s portfolio where short-term funding needs will be drawn from. This portfolio is often made up of Money Market Unit Trust Funds as they are liquid and their value is stable; and is toped up from the best performing assets in the Prudent and Growth portfolios.

    The Prudent Portfolio - This portion of the portfolio is the reserve fund safety net. Market movements and fluctuations have little effect on this type of portfolio. Should the long term growth portfolio decrease suddenly, this portfolio would allow enough time for a recovery before having to use funds from the Growth portfolio for the organisation’s operational needs.

    The Long Term Growth Portfolio - This is invested for growth to make sure the reserve fund beats inflation over the long-term. This part of the portfolio is usually the most volatile but because it is invested over the long-term, this does not present a problem.

    The next step is to allocate specific amounts to the underlying funds within each of these investment categories.


    Whilst offshore diversification (investing some of the funds outside of South Africa) can have a very positive effect on a portfolio, the fluctuating value of the Rand (currency volatility) can have a significant effect on returns. Reducing currency risk through hedging, a technique to guard against foreign exchange fluctuations is a way that Wealth Managers manage this risk.

    Endownments

    An endowment is an established pool of assets (for example rented property, cash, shares, bonds) used to generate income to fund the operations of an organisation. This reduces the organisation’s dependency on donors.

    Endowments are often established by bequests or restricted donations. In some circumstances, the donor will make a large grant and stipulate that it be invested, with the principal to remain intact in perpetuity or for a defined time period. The organisation can use the interest or dividends from the endowment to fund their operating costs while also keeping the original grant. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

    Reserves can be used to create endowments. Once a reserve has been built to the required level, all income earned in excess of the reserve requirement and returns on investments in excess of inflation can be used to build an endowment.

    Just like investing a reserve, it is important to get advice from a reputable wealth management company who has the capacity to choose the right investment solution for an endowment. Given the long-term nature, size and income-generating requirement of a typical endowment, the optimal investment solution can sometimes be more complex than that of a reserve.

    Fees and Costs

    All this wealth management expertise does not come for free and different investment solutions will have different costs and fees. Some wealth management businesses apply a fee based remuneration model for advisory, administration and fund management services, while others charge commission (a percentage of the funds under management). Registered public benefit organisations are sometimes offered discounted fees because of the charitable nature of their work.

    All registered financial service providers are required by law to disclose all of these fees in a clear and understandable way. This means that an organisation can compare fees and be clear about what the investment will cost them.

    Whether you are a new organisation just starting out or a large organisation with an established endowment, your Reserve and Endowment policy should be regularly revisited to make sure you are making the most of the funds you have. The investment solution you choose must be aligned with this policy and based on sound financial advice. This will ensure that these funds are optimally invested while minimising the organisation’s exposure to unnecessary risk.

    To find out more about investing your reserve, contact: Citadel Wealth Management.
  • Real Risks

    There are many risks that confront nonprofit organisations today and some arise where an organisation has a phase of rapid growth in resources. We have noted this, particularly in relation to new ‘social movements’, with activism at their core, which have been achieving significant success in raising public awareness and in raising funds.

    Charles Tilly defines social movements as ‘a series of contentious performances, displays and campaigns by which ordinary people make collective claims on others.’

    A number of such movements have received substantial initial funding leading to rapid growth, others are still growing or are poised to grow.

    With growth comes both increased numbers of paid staff (employees), who are often deployed over a wide geographical area, and increased levels of activities. Together, these areas of growth result in an increased need for effective financial management systems and controls and for an organisational infrastructure that few can afford, or are prepared to pay for.

    Bigger budgets!

    As budgets get bigger (due to increased monthly financial commitments), the need for good financial management increases but the associated costs become more difficult to finance, especially if the initial funders later withdraw or reduce their support.  We are now seeing large, previously well-funded and effective organisations using up their hard-earned reserves (built up over many years) in order to meet their on-going obligations to pay staff and other running costs. What is happening?
    Shifting funds!

    With some exceptions, we are seeing funding shift away from established organisations, some of the funding is then switched to emerging social movements and related organisations which are seen to offer a new dynamism, mobility, profile and exposure at a lower cost than the more established organisations with a longer track record.  Whatever your views are on whether this is a wise move on the part of funders / donors and on whether such funding will be for the longer-term, our experience tells us that, if you do not invest in the very necessary costs of systems, controls and infrastructure or the lack of them will come back to bite you!
    Disastrous consequences!

    Lack of effective financial management systems, controls and infrastructure may result in one or more of the following:
    • Inability to account for, and report back to funders and supporters on, funds received;
    • Disgruntled staff, funders and other stakeholders;
    • Waste and/or misappropriation of resources (including, but not limited to, cash);
    • Damaged reputation;
    • An inability to carry out necessary financial planning and strategic financial thinking;
    • Cash flow crises.
    The list goes on!

    Financial management expertise

    Failure to set up appropriate financial management systems from the beginning is a big mistake and a patch-up job later, when the gaps and negative consequences  are already obvious, may prove to be more expensive than the implementation of good systems from the start would have been. At a later stage, it will also become even more difficult to secure funding to implement / upgrade systems. Every organisation (regardless of size and track record) needs access to financial management expertise. Good finance administrators, bookkeepers, accountants and financial managers are in short supply and are expensive to employ, but all organisations need the skills they offer.  This is not an expense to hold back on and it is wise to:
    • Employ or contract experienced and well trained finance staff or service providers from the outset; and
    • Ensure the finance staff are given adequate support and training in line with their responsibilities. 
    By delegation from the governing body, financial management responsibility rests with the executive director of each organisation, but such directors often have little time for this function and/or feel out of their depth. If your organisation cannot afford a full-time or even part-time financial manager, please remember that CMDS is available to assist you and to walk with you in the set-up and maintenance of effective financial management systems, including, if necessary, the recruitment and screening of finance staff.

    -  This article first appeared on the CDMS Website.
  • Zim’s Debt Clearance Plan Gets Thumbs-Up

    The African Development Bank (AfDB) says the International Monetary Fund's (IMF) supervised economic reform is indicative of the significant improvement in Zimbabwe's cooperation on economic policies and its commitment to address its arrear problems.

    The bank points out that the, "Implementation of the Staff Monitored Programme (SMP) should help establish a track record of sound policies and is an important stepping-stone towards arrears clearance and an IMF-supported debt relief programme."

    It further states that debt relief should help free resources from debt service to support the underfunded public sector investment programme.

    To read the article titled, “AFDB commends Zim's debt clearance plan,” click here.

    Source: 
    All Africa
  • Signs of Trouble!

    More and more we are starting to read in the news of nonprofit organisations going into liquidation and closing down.  CMDS is often called on to assist organisations that are already in financial crisis for reasons such as:  
    • Inability to get a tax clearance certificate needed to secure funding;
    • A dispute of one kind or another;
    • Suspicion of fraud or theft;
    • An unexpected but significant financial obligation to report or pay; and
    • Threat of closure due to lack of funds.
    In such cases we often find that the crisis could have been averted, or at least better anticipated and/or managed.      

    So what are some of the first signs of financial trouble for an NPO?  

    You might think that cash flow difficulties, particularly an inability to pay costs such as salaries, rent, and other running costs, would the first sign of trouble. However, it is our experience that cash flow difficulties today are the result of trouble that started much earlier and should have been picked up and addressed.  

    Trouble may be brewing at your organisation that you may not be aware if:  
    • Financial recordkeeping is not up to date -  it is not uncommon for us to find that either no transaction capturing is being done at all or that capturing is months behind.  The records of your organisation should be captured into an accounting package (such as Pastel or Quickbooks) and reconciled to bank statements to the end of the previous month by the middle of the next month.  You do not even need to wait for the auditors to finalise the previous year’s records and reports to start capturing and checking the next financial years’ records;
    • Financial reports are not presented to, or not considered regularly by, the management (monthly) or the board (quarterly);
    • Financial reports are inaccurate or incomplete or do not agree to the underlying accounting records. Often, such reports are presented on Microsoft Excel spreadsheets with no reconciliation to actual balances in the bank accounts, in such cases, the information cannot be relied upon for good decision-making.
    • The situation revealed by the financial reports is not fully understood or is simply ignored, appropriate questions are not asked and actions are not taken even when complete and accurate financial reports are presented and considered;
    • Monthly cash flow forecasts are not prepared and scrutinised, starting with the balance in the bank today and realistically forecasting the expected cash inflows and outflows month by month showing the resulting closing balance of funds per month for the year ahead; and
    • There is a lack of independent regular checking of the work of the finance person, who is often trusted to carry out all the necessary financial and legal obligations of the organisation unsupervised, including meeting the South African Revenue Services (SARS) requirements. This leaves the organisation vulnerable to the effects of normal human frailties, such as forgetfulness, omissions, errors or even fraud. Financial records and systems need to be regularly independently checked – not just by the auditor once a year so that the finance person can be held accountable.
    What are some of the other tell-tale signs of trouble?  
    • Ongoing deficits - expenditure is consistently higher than income (or put another way the regular income is not enough to pay for regular expenditure) in general or for particular projects;
    • Liquidity problems – cash in the bank today is not enough to pay the outstanding debt already owed today – so putting off paying what is due today until some money comes into the bank.
    • Delaying payment of salaries to staff or payments to SARS for employees tax and UIF.
    • Letters of demand for payment from suppliers, contractors etc.;
    • Using earmarked grants and donations when received into the bank account to immediately pay outstanding debts;
    • Taking loans – either personally or from others;
    • Depleting reserves or savings – needing to draw down on savings and to cash in or sell investments or other assets to meet ongoing expenditure commitments;
    • Borrowing from Peter to pay Paul – using money received for one purpose to pay for expenditure for another purpose often with the intention to repay when ‘other money’ is received. However, the “other money” gets less and less and finally dries up completely leaving you unable to replace the borrowed money and unable to report honestly on the spending; and
    • Falsifying reports to funders to cover up the mess and get funds released.
    Many organisations are constantly experiencing these challenges, so much so that many accept this state of affairs as ‘normal’ for an NPO.   
     
    What to do?  Make sure that the organisation’s financial systems are sufficient and are operating effectively and that you are constantly aware of your organisation’s actual and accurate financial situation – be wise and take action earlier rather than later.   

    - CMDS is available to assist, advise and support your organisation. For more about the CMDS, refer to www.cmds.org.za.
  • Bill Aims to Improve Lotto Distribution

    The Minister of Trade and Industry, Rob Davies, says Cabinet has approved the Lotteries Act Amendment Bill, which is aimed at reforming the lottery system.

    Davies pointed out that the Bill is aimed at dealing with challenges such as the strict requirements for non-governmental organisations, poor relationship between the National Lotteries Board and the beneficiaries, and the delay in the distribution of funds, among other things.

    He noted that the Bill proposes the appointment of full-time staff at the distribution agencies, since the current staff is working on part-time basis. He further said that staff at distributing agencies will only be appointed based on their skills and competencies and that those appointed will be forced to relinquish their interests in organisations that apply for Lotto funding.

    The Bill will also ensure that the requirements for financial statements are in line with the Companies Act, which calls for stronger reporting on how the grants are utilised. In addition, Davies reiterated that 80 percent of the budget should reach the beneficiaries.

    For more about the National Lotteries Board, refer to www.nlb.org.za/general-public.html.

    Source: 
    SANGONeT
  • The ABCs of Taxes in the Nonprofit Sector

    Many charities do not realise or understand the benefits of being registered as a public benefit organisation (PBO), Hoosen Agjee explains.
     
    In our many years working with the nonprofit sector (NPO) sector, we have identified that a significant number of organisations are still unaware of the specific tax benefits available to them,’ says Hoosen Agjee, managing director of Turning Point Consultants (TPC) and author ofTax Benefits for the Nonprofit Sectorand A Guide to the New Companies Act and Nonprofit Organisations.
     
    In fact, he adds, “There’s a common misconception that an exemption from Income Tax and certain rates are perhaps the only benefits available to the sector’. Agjee says that, “All is not lost for NPOs who haven’t been tax efficient in the past.” TPC has designed a system tailored specifically for such organisations, measuring the quantitative impact of such inefficiencies, and more importantly focusing on practical solutions to remedy this. With many organisations experiencing significant reductions in donor funding, these savings and recoveries have also opened up an additional recurring income stream for NPOs.
     
    When Agjee published his first book,Tax Benefits for the Non Profit Sector, in August 2002, the general comments received from NPOs included:

    • What has tax got to do with NPOs?
    • As an NPO we are exempt from taxes – we don’t pay taxes;
    • We have an NPO number therefore we can access all the tax-benefits; and
    • As we are a Section 21 company, we can issue our donors tax deductible certificates.
    ‘These comments could not be further from the truth, he says.
     
    What is a Nonprofit Organisation (NPO)?
     
    An NPO is any entity (whether formally registered or not) which carries out activities in a nonprofit manner.This means that any surplus or gains that the NPO makes will not be distributed to any individual, member or trustee of the organisation but shall be for the benefit of such organisation. NPO activities could relate to social, religious, educational, welfare and the list goes on. The fundamental requirement is that the NPO should not promote the economic interest of any individual or employee. Therefore, most or all organisations may be regarded as NPOs if they meet these criteria.
     
    What are the benefits of an NPO number?
     
    The NPO Act regulates NPOs in South Africa. Once an NPO meets the requirements of the NPO Act, it may apply to the Department of Social Development and on qualification, the organisation will be issued with an NPO number which results in the following benefits:
    • Public recognition;
    • Promotes good standing;
    • Transparency and accountability in activities; and
    • Promotes access to government and corporate funding. 
    However, an NPO number does not give the organisation any tax benefits.
     
    Unlocking tax benefits
     
    Our government, recognising that NPOs play a significant role in society, has designed specific tax benefits and exemptions to assist NPOs in meeting their objectives. Their principal aim is to ensure monies that are required to provide goods and services, which are generally for the benefit of the poor and needy, are not trapped as a tax cost.
     
    Obtaining a tax exemption
     
    The Income Tax Act defines the types of activities that an NPO can undertake before it is granted a tax-exempt status. Inaddition, the NPOs’ founding documents must comply with the requirements of the Act. NPOs that meet these requirements can take advantage of the tax benefits to reduce their tax burden and obtain other benefits. Obtaining a Tax exemption is not automatic. An application must be made to the South African Revenue Service (SARS) who, on review, will grant the NPO a tax exemption status. Once tax exemption is approved by SARS, the NPO obtains a Public Benefit Organisation (PBO) status.
     
    Who can access tax benefits?
     
    To access the tax and other benefits, the NPO has to be classified as a PBO and must undertake PublicBenefit Activities (PBAs).
     
    What is a PBO?
     
    A PBO is any welfare, religious or cultural body, private school, bursary fund, charitable body, charitable trust or sporting body approved by SARS. The PBO can be structured either as a nonprofit company (commonly known as a section 21 company), a trust or an association of persons.
     
    What are Public Benefit Activities (PBAs)?
     
    SARS has defined different fields of activities that a PBO can undertake for it to qualify for tax exemption. These activities are known as PBAs and are classified under:
    • Welfare and humanitarian;
    • Religion, belief or philosophy;
    • Cultural;
    • Health care;
    • Education and development;
    • Land and housing;
    • Conservation, environment and animal welfare;
    • Research and consumer rights;
    • Sport; and
    • Provision of funds to other PBOs 
    Tax benefits to donors
     
    Donors also benefit when donating to a PBO compared to any other organisation.By donating to a tax-exempt PBO, the donor may achieve, among others, the following tax benefits:
    • 20 percent donations tax;
    • 20 percent estate duty; and
    • 10-14 percent capital gains tax. 
    To further incentivise donors to donate towards certain PBAs, government has also introduced additional tax savings to donors.Where a donor donates cash or in kind to PBOs, which are conducting certainPBAs, the donor will also achieve income tax savings by claiming a deduction of the donation against their taxable income.
     
    Claiming tax deductions from SARS
     
    Where donors have made donations to those PBO’s limited to conducting PBA’s under the following categories:
    • Welfare and humanitarian;
    • Healthcare;
    • Education and development;
    • Land and housing;
    • Conservation; and
    • Environment and animal welfare.
    They obtain income tax benefits because they can be issued with tax deduction receipts from that PBO (knownas an 18A certificate). The donors may then use these receipts to claim their donations as tax deductible expenses from SARS in their annual income tax returns. PBAs of a religious or cultural nature (such asart galleries and museums), and sportand recreational bodies do not qualify for an 18A status from SARS and consequently cannot issue 18A receipts for these donations.
     
    Who can claim and how much canbe claimed?
     
    All donors - including salaried employee, a company or close corporation - can claim this deduction from SARS. The claim is however limited to 10 percent of the donor’s taxable income. The donation can be in the form of cash or in-kind (e.g. a supermarket may donate groceries and still qualify for this tax benefit).
     
    Donors prefer tax–exempt charities
     
    There are thousands of NPOs all competing to get their share of donor funding. A tax-exempt PBO stands a better chance of getting donor funding than one that doesn’t have this status. Tax exemption is a win-win situation for both donor and recipient because:
    • The donor gets the satisfaction that, where an organisation is tax-exempt, every cent of the donation reaches the targeted beneficiary instead of it being earmarked for taxes and duties;
    • The organisation’s expenditure is reduced by the tax saved and it can use the savings for its activities; and
    • The donor achieves income tax benefits on donations made to section 18A PBOs. 
    About the Turning Point Consultants
     
    Turning Point Consultants (TPC) began as a consultancy practice established more than 25 years ago. As a multi-disciplinary firm, TPC offers a comprehensive and seamless tax recovery and related consultancy service tailored specifically to meet clients’ needs while delivering value added benefits for the NPO sector.
     
    - Hoosen Agjee is director at Turning Point Consultants. This article first appeared in the Downes Murray International’s Fundraising Forum electronic newsletter. He can be contacted on 083 282 8786 or 031 208 2458 or e-mailed to reza@tpcsa.co.za.

    Author(s): 
    Hoosen Agjee
  • Should NGOs Embrace A More Business-Like Approach?

    This is Part 2 of a two-part series of articles to assist NGOs in the transition towards greater autonomy. We explore some actions that can assist with transition to a more businesslike approach, and also take a closer look at income generation and its viability in the non-profit context.

    Think Like a Business

    Let’s start by looking at four important ‘re-thinking’ strategies that help an NGO make the transformation to greater success:

    1. What is the trade? Understanding the ‘fair value exchange’

    A key ‘aha moment’ in the transformation of an NGO is the recognition of the value that NGOs offer to funders.

    In a traditional business environment, the value exchange is easy to spot as goods and services are exchanged for money. Key to this successful relationship is a win-win for both parties in the form of a balanced or fair value exchange. In a nonprofit context, it can be more difficult to recognise what is being exchanged and to know when this is equal or fair.

    The starting point therefore is to recognise what we are exchanging. What exactly is the trade?

    Generally NGOs provide a service making a difference and uplifting communities in areas of need. Funders want the same end results, but can’t achieve this without NGOs and effectively pay them to deliver the results they wish to see. The NGO becomes the service-provider of social change.

    As an example, an NGO providing HIV counselling in impoverished areas is delivering on their mandate to develop healthy communities. For a corporate social investment (CSI) manager whose mandate is to make a difference in communities in this way, you are a Godsend! You are the implementing agent of their vision, and your service delivers the outcomes that they seek. In this case the fair value exchange is community empowerment in exchange for money (funding) – and remember that the more visible, tangible and measurable this outcome is, the more readily it can be valued by the funder.

    2. Who is the client? Using client-centred thinking

    Most NGOs view their beneficiaries as their client and are totally focussed on providing added-value goods and services (usually for free) to the people, community or cause that they serve. The business-like approach sees things differently.

    In business terms, a client is someone who pays for goods and services. As radical as it may seem to some, this means that the NGOs’ client is actually the funder, not the beneficiary, and it is this paying client that enables the services of the NGO to be delivered. Of course a sincere commitment to the servicing of this beneficiary community is at the authentic core of any reputable NGO, so we are not suggesting a diluting of this commitment, but rather recognition of the role of the primary funder client, without whom the NGO will simply cease to exist.

    Recognise who your real clients are, and look after them like gold!

    3. Costing and pricing – who pays the overheads?

    A common challenge in the nonprofit sector is that many funders shy away from covering running costs and overheads, and are especially prickly about salaries. This is understandable from the funder perspective, as they are reluctant to fund a lavish, lax or unproductive organisation and because it is nearly impossible to quantify impact from supporting the running costs and salaries of a service-provider organisation, nonprofit or otherwise.

    Now we are in no way suggesting that all NGOs are lavish, lax or unproductive, but it is the responsibility of the NGO to prove this and to motivate these costs as part of an effective, productive unit.

    The reality is that any organisation must recoup its running costs to survive. In costing terminology this is known as overhead contribution or overhead recovery, and it is generally added to the price as a percentage of direct costs (raw materials and direct labour). Typical overhead contributions can range from 15 – 40 percent, depending on the size of the organisation and the overhead structure. What this means is that to be sustainable, your organisation should be building into the budget a contribution towards overheads; it can be in the form of project managers’ fees, administrative costs etc, all perfectly legitimate and justified as long as they are project-specific and not inflated or unreasonable.

    Know that overheads exist and are a legitimate part of the operational costs of all organisations, and find ways to make them palatable to your funding client!

    4. Return on investment – understanding the terminology

    We spoke in the first instalment about Return on Investment. In business terms, this simply means getting something back for what you put in, usually in the form of profits or other strategic advantage. In the CSI and development context, this includes the beneficial outcomes that result from investment in a project, community or social initiative. Sometimes called ‘Return on Social Investment’ this return can be measured in social terminology such as people supported, CO2 reduced, children educated, rather than in pure monetary measures.

    Secondary returns can also be very important, and benefits such as positive media and public relations opportunities, the chance to form strategic partnerships with government and other stakeholders and the generation of goodwill and brand loyalty can be a very valuable return on investment for funding clients.

    The nonprofit that understands the concept of return on investment and its importance to corporate clients especially, will have a better chance of developing long-term funder relationships.

    If You Do It, Do it Properly

    While many nonprofit and related organisations run income-generating initiatives, success stories are few and often use outside expertise (advisory Board, mentors, consultants etc) to guide growth. The reasons for this are varied but a common denominator is a lack of singular purpose – many non-profits start income generation programmes as an add-on to their core activities (whether HIV support, social services, advocacy, feeding schemes etc) and thus find it difficult to commit the full and necessary resources that the initiative needs to be self-sustainable. This is in contrast to a typical business, where sharp focus is needed if one is to succeed.

    We recently received an e-mail from an NGO colleague asking for assistance with the product development of handbags made from recycled newspaper. The intention was to capacitate a group of unemployed women to make the handbags to generate income for themselves, and some commission for the NGO itself. Their plan was to build up some stock and then look for potential markets.

    This is sadly a very typical scenario in NGOs across South Africa – whereby an income generation project is started with excellent intentions but little planning. Our response to her was as follows:

    1. The starting point for any income generation initiative (like any business) is finding a viable market. Who, where, when, how and at what price would be typical questions to ask. (the market-led strategy);
    2. Once the market is better defined the next step is finding or developing a suitable product for that market, bearing in mind the competition, variances in taste, quality, design and trends (market-led product development);
    3. This should be followed by developing the appropriate business infrastructure, and the necessary basic systems and methods to run the business operation, including HR, sales, marketing, admin, financial etc;
    4. Only after these steps are complete should we venture into training producers to produce, refining the product to ensure that it is manufactured and supplied at a sustainable margin, and making up some samples or stock.
    90 percent of nonprofits make the mistake of starting at point four.

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    - Catherine Wijnberg is director and Anton Ressel development practitioner at Fetola & Associates.

    Author(s): 
    Catherine Wijnberg
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